Segment 1 Of 3     Next Hearing Segment(2)

 Page 1       TOP OF DOC    Segment 1 Of 3  


U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    The committee met, pursuant to call, at 10:00 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives McCollum, Roukema, Baker, Lazio, Royce, Metcalf, Ney, Barr, Kelly, Paul, Weldon, Ryun, Hill, Manzullo, Ryan, Ose, Sweeney, Biggert, Terry, Green, Toomey, LaFalce, Vento, Frank, Kanjorski, Waters, Watt, Bentsen, J. Maloney of Connecticut, Hooley, Weygand, Sherman, Lee, Mascara, Inslee, Schakowsky, Moore, Gonzalez, Jones, and Capuano.

    Chairman LEACH. The hearing will come to order. Today we begin the first of three days of public hearings on legislation to modernize our Nation's archaic, Depression-era banking laws which were long ago overtaken by market developments. This is, as everyone here knows, an issue which has been under consideration in Congress for several decades. Last fall we came close to achieving consensus and the bill before us reflects compromises hammered out over four years of consideration.

    Today we are starting off these hearings with broader support for the legislation than has ever existed before. An impressive number of large and small commercial banks, regional and money center securities firms, insurance companies and agents support the approach on the table.
 Page 2       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    The bill before us was introduced by myself, Vice Chairman McCollum, the chairs of all of our subcommittees and other Members. A bill with similar goals will apparently be introduced later today by Mr. LaFalce, which reportedly will largely have Administration support. I consider this to be a constructive addition to the policy dialogue.

    Thus, I hope we are in the final lap in winning congressional approval of financial services modernization.

    In conclusion, let me stress that if we fail to move on legislation of this nature, American international preeminence in financial markets will come into question, the American consumers will be denied the benefits which would flow from greater competition within the financial arena, and many rural areas will be precluded access to a broad range of financial products. Here, let me remind everyone that two years ago Treasury Secretary Rubin estimated the consumers could save an estimated $15 billion annually as a result of passage of modernization legislation.

    In the interest of time to hear from our distinguished witnesses, I will recognize Mr. LaFalce for an opening statement. Following Mr. LaFalce, I will recognize the Chairman and the Ranking Member of the two subcommittees with primary jurisdiction.

    John, you are recognized.

    Mr. LAFALCE. Thank you very much, Mr. Chairman. First I would like to commend you personally and your efforts to move forward expeditiously on this very important issue of financial modernization. This is something that I have pursued the entirety of my tenure in Congress, and that is over two decades now, and it has eluded us. And I hope it will not elude us this Congress. I hope we will pass it this year.
 Page 3       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    As a result of the deliberations of the last Congress, most especially in the Senate, consensus emerged regarding many of the central components of viable modern legislation, and you have introduced legislation which in large part reflected that consensus. However, I do have some doubts whether the best vehicle at the end of the last session is the most appropriate vehicle for beginning what will necessarily be a new process involving new players and possibly new issues.

    As a result, this afternoon I will be introducing legislation along with Financial Institutions Subcommittee Ranking Member Bruce Vento, and Capital Markets Subcommittee Chairman Richard Baker, he takes a somewhat different approach. And while there are some differences in starting points, what is clear upon examination of both bills, is that we agree on far, far more than we differ on. For example, we agree new affiliation authority for financial services providers; the nature of those products and services we consider financial in nature, the appropriate regulatory framework, the importance of functional regulations, to name just a few.

    As we proceed and even before markup, I think the best approach for us is to obtain as broad a bipartisan support as we can to maintain consensus where we clearly have it, to avoid contentious issues that are not central to the changes we must make and achieve compromises that I believe are readily obtainable on those few but vital issues where we differ.

    If we are to get beyond committee and have a bill that actually can be enacted into law, there is one central player in this discussion that we cannot ignore, and that is the Administration. And so most importantly the bill we will introduce this afternoon will include language on the controversial operating subsidy issue that the Treasury can enthusiastically support.
 Page 4       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Now, that is very important, because without Administration support, we risk legislating in vain. And without that support, it will prove extremely difficult to obtain the broad bipartisan support that is essential if we are to succeed. There are a few issues that are going to be difficult, Mr. Chairman, and one deals with the thrift charter. Our bill is going to be silent on that.

    I think modernization should be about moving forward, not taking existing authority from institutions when there is no real legitimate case, in my judgment, that there is a problem that they pose safety and soundness risks.

    Second, and I know this is even more important to you as you have strong views about banking and commerce, others do, too, the Fed, Treasury, but I believe we all understand that there are existing financial-commercial relationships that must be accommodated if all of the industry is affected by this bill and to have the full range of opportunities it creates, and there is more than one way to accomplish this.

    What Mr. Vento and I and Mr. Baker have done is to include within the bill the approach that was adopted by this committee in the last Congress as a starting point. There was ambivalence on the House floor. I mean, Mrs. Roukema offered an amendment for a 10 percent basket that passed; Mr. Leach offered an amendment for no basket that passed.

    This area cries out for compromise. And I look forward to working with you as soon as these hearings are over to achieve that compromise on those issues where we differ, although, again, I reiterate, we agree on the vast, vast majority of issues, and I thank the Chair very much.
 Page 5       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Chairman LEACH. Well, thank you very much, Mr. LaFalce.

    Mrs. Roukema.

    Mrs. ROUKEMA. Thank you, Mr. Chairman. I will try to be brief, I always say that, but let's see if we can be. I am pleased to be here today. I would also say that I had hoped, given the long history of this legislation going back many years and certainly with the intense work that we did last year, and as close as we came, that this would not be necessary. I might also observe that the Senate did some very excellent work last year through its committee, although it never got to a vote on the Senate floor.

    I guess I am looking forward eagerly to these hearings, but I hope that we are not going to totally reinvent the wheel. I think there is some outstanding questions. We will ask those questions of the witnesses that are going to be appearing here. I hope we can restrict ourselves to new substantial information rather than going through a lot of the same rhetoric, but we shall see.

    Mr. LaFalce has—and I am not intimating that there aren't still significant areas of controversy or differences of opinion—but I will say no one would have thought a year ago, or certainly not two years ago, that we could have come so close to enacting a bill and reaching apparent industry agreement relating to securities as well as the insurance questions. We have gone far beyond expectations. At least that is my understanding.

    I will admit that some differences remain. These differences may be highlighted in comparing our bill, Mr. Leach, to Mr. LaFalce's bill. With respect to H.R. 10, I was happy to cosponsor, not that it had everything that I would like, but it is a more than just a good start, it is an excellent start.
 Page 6       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    But Mr. LaFalce's bill, which he is introducing today, does raise, as he also pointed out, the question of banking and commerce. But I would associate myself with at least the observation that this does cry out for compromise, and I think the compromise is out there. Whether it is definitional or some other approach, we can come to agreement as to how we face the real world, the real world of what is out there with respect to commercial interests as part of banking.

    And I won't go into any more on that. We can give lots of examples such as the Deutsche Bank and Bankers Trust acquisitions and other issues, but we will leave it at that and hopefully we can come to some compromise on what these complementary activities could be, whether to define as a basket or otherwise.

    But one of the other questions that continues, and I have been fairly, fairly clear, if not outspoken on this question, and that is the functional regulation and bank holding company versus the operating subsidiary. I will be eager to question the Administration witnesses on this subject. It is a continuing deep concern of mine that I would oppose the operating subidiary proposal as has been backed by the Administration. I would stay with the holding company format because I think that is a far better route to safety and soundness and the firewalls that we have always said so desperately are needed.

    But I guess finally I would just conclude by saying, no matter what, we have got to pass a good bill this year. It will be a sad day if this Congress, both the House and the Senate, say that we are not able to fulfill our constitutional responsibility. If we don't get this done this year, the genie is already out of the bottle, we will never be able to put the genie back in the bottle and we will have essentially said that the regulators and the courts will be the jury on this subject and will be writing financial modernization rather than the Congress.
 Page 7       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    And I for one do not intend to abdicate our constitutional responsibility here in that respect. Let's get to work on it and get it done.

    Thank you, Mr. Chairman. I appreciate it.

    Chairman LEACH. Thank you, Mrs. Roukema.

    Mr. Vento.

    Mr. VENTO. Thanks, Mr. Chairman. I appreciate your holding these hearings on H.R. 10, financial modernization in general, and especially want to welcome all of the witnesses. Most of them we have come to know by their first name, Mr. Chairman. We especially want to welcome R. Scott Jones, the new president of the American Bankers Association from Red Wing, Minnesota. It is a little bit out of my area, but I claim him as a Minnesotan, and I think he is going to be a very positive force in terms of working with us.

    He has been well schooled in our State, running a financial institution from Red Wing, Minnesota, and we look forward to his testimony. I think if we look at his testimony today and follow his instructions, we would be well advised it comes close to embracing many of the best ideas of both bills.

    Mr. Chairman, last session, in spite of our admonitions, we missed enacting a law on modernization by a wide margin and, in fact, some significant polarization exists today, because of the outcome and especially the process. Things put over the fire too long burn. A wonderful margin in the House with voting strung out for an hour and a Senate measure that was to be enacted upon without formal House input and facing a veto threat, there is not much to be emulated in that process model. We can and should do better.
 Page 8       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    So today is February and like the swallows returning to Capistrano, financial modernization returns to the Congress, congressional agenda, home to roost once more. Hopefully we can end this seasonal financial modernization phenomena in this Congress and move on down the trail or down the flight path toward modernization of financial service laws, so that we can properly reflect the current market situation.

    Encouraged by the regulators competition, the law code and policy, we should be able to provide positive framework for financial services in the future on which to build our mixed economy.

    Today there is much—today may be a crash course for some of our new Members and intensive refresher for the rest of us. These three days of hearings scheduled so closely together will make it hard to digest all the testimony and issues. It is important to provide this forum and continue to explore the topic fully in the committee before moving to write and act upon financial modernization.

    Certainly we appreciate the continued work and partnership of our many scheduled witnesses. I applaud the work of Chairman Leach and Ranking Member LaFalce for advancing measures which build upon the work of our past four years. These measures contain sound provisions that will help shape the final proposal this committee can pass in a bipartisan basis.

    With the active interest and support of House Members, outside parties and the Administration we can work to accomplish this goal. The task will be to keep existing support on board while adding others without tipping the boat. We need to build bridges across party lines to obtain a sense of committee ownership for the policy path as we move to the Senate so that we can ultimately produce a measure that will win the approval of the Administration and a Presidential signature.
 Page 9       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    We have much to work to do, but every journey begins with a single step or should I say a series of opening statements. We will encounter issues upon which we agree or disagree, commercial basket, WFIs, unitaries, affiliates, pushouts, op sub banking semantics, you name it, we will debate it, process it and vote on it.

    In the end this committee and the Congress can produce a bipartisan bill. And if there is a willingness and a little luck, I guess, to work together. Thanks, Mr. Chairman, I look forward to working with you.

    Chairman LEACH. Thank you, Mr. Vento.

    Mr. Baker.

    Mr. BAKER. Thank you, Mr. Chairman. I want to again applaud you for your tireless efforts on this subject matter. You more than anyone have fought a very long uphill battle and continue to remain tirelessly optimistic. And for that, I want to express my appreciation. I also would like to respond to the observations of the gentleman from Minnesota with regard to the swallows returning to Capistrano. When they all too often have flown into the room, we have opened hunting season. I think it appropriate that we at least have one live bird leave the committee room, for our future's interests.

    It is important, Mr. Chairman, you succeed. Over the years technology and markets have changed rather dramatically, and those who are bright in the market have leveraged congressionally created loopholes to have allowed innovations to proceed, despite the fact that laws written in the 1930's or attempting to regulate modern business practice. And it really raises the question, why should Congress arbitrarily block innovation?
 Page 10       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    I have always felt the core of the free enterprise system is to allow individuals or businesses to make business judgments they deem best for themselves or their investors. And it seems a bit ironic in a day and time when literally billions of dollars are being traded this morning in electronic commerce or billions of dollars are changing hands in business products that simply did not exist a decade ago, that we expect the laws written in the 1930's to possibly keep pace with the market.

    Mr. Chairman, whatever the end product may look like, I want you to know I, for one, will certainly support that effort. However, I think during the course of these deliberations, valid differences of opinion on policy and financial regulation will be offered. I hope the committee product at the end of the day is one which can navigate through the congressional process. I join with others in saying that we are once again far too late in developing a common sense framework in which technology innovation and business practice can proceed in a logical manner.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you very much, Mr. Baker.

    Mr. Kanjorski for a statement.

    Mr. KANJORSKI. Thank you, Mr. Chairman. Abraham Lincoln took three minutes to make the Gettysburg Address. I will try to be as succinct. I want to compliment you for holding this hearing. I am looking forward to seeing how we can craft a bill that meets at least three concerns of mine. I start off with the proposition that in some meetings I had with the Treasury Department, there was a strong indication that just the need to pass legislation is not the call of the day or the right order. We should only pass legislation if, in fact, it is good and improving legislation, and I think that should be our guideline here.
 Page 11       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    The considerations and concerns I have for this bill are: one, I still do not know what should happen in separating commerce and banking. Maybe we should wait and see what happens in Japan and Germany, and analyze whether any of their significant economic and financial problems have been caused or could be protected against if we keep the separation. So, I am certainly interested and also worried about rushing headlong into breaking down the firewalls of banking and commerce.

    Second, there is not any question that in any legislation that comes out that consumers' protections and rights should be adequate and even superior to what they are now. One of the major concerns that we all have, of course, is the protection of privacy, upon which the modern world and electronic revolutions have caused concerns.

    My final concern is that every community should share in the rewards if we modernize financial services. It is just not the big banks, but it must be the small banks. It must be the small towns, and it must be those areas of the country that could be under extraordinary pressure if we pass modernization. It is a free, open field for the reorganization of assets and financial control of the country as opposed to facilitating the development of banks.

    I particularly look forward, Mr. Chairman, to testimony today by E. Lee Beard of my congressional district, who is chair of America's Community Bankers. I think her testimony will give us a great deal of insight as to how pending legislation will not only modernize, but also provide the outline and the playing field for small community bankers and the distressed communities of Americans that rely on the community bank system.
 Page 12       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    I look forward to joining with my colleagues on the committee in the debate today, but I am at this point not able to support any particular piece of legislation until these three concerns are addressed. Thank you, Mr. Chairman.

    Chairman LEACH. Well, thank you very much.

    And let me welcome our panel. We have before us very distinguished American citizens representing some of the finest American public corporations in finance.

    Our first witness will be Mr. David H. Komansky, who is Chairman and CEO of Merrill Lynch & Company. He will be followed by Mr. Michael Patterson, who is Vice Chairman of J.P. Morgan & Company and Chairman of the Financial Services Council; Mr. John B. McCoy; who is President and CEO of BANK ONE Corporation; and Mr. Richard L. Huber, who is Chairman, President and CEO of Aetna, Inc.

    We will begin, unless there has been mutual accommodation with the panel, with Mr. Komansky. Please proceed.


    Mr. KOMANSKY. Thank you, Mr. Chairman, Members of the Banking Committee. I am honored to be here at Capistrano or, excuse me, I am honored to be here with my colleagues from the banking and insurance industries, and I thank you for the opportunity to testify. The American financial services industry as you know is second to none. We have achieved leadership in every major area of global finance, but today this international leadership is threatened because of an archaic regulatory system here at home.
 Page 13       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    In our global economy capital is dispatched around the world at the speed of light, but the laws that govern our markets were written at a time when high technology meant talking pictures. Mr. Chairman, we are speeding into the 21st Century in a vehicle that was designed in 1933. This is the legacy of the Glass-Steagall Act which, as we all know, divided America's financial services industry into neat boxes, determined by products. Banks, insurance companies and securities firms were left to operate in their own worlds with very little competition among them.

    For consumers, this meant separate trips to a broker to buy stocks, to a bank to make deposits and so on. But the realities of the marketplace have not squared very well with this narrow view of financial services. Today our clients, your constituents, increasingly find that their most precious commodity is time. They demand convenient, one-stop shopping to meet their financial needs from checking and savings accounts to mortgages and estate planning.

    But thanks to our outdated laws, financial firms have only been able to meet these needs by becoming corporate contortionists. We are forced to exploit loopholes or look to regulators or the courts for latitude to enter into another industry's turf. This is not only inconvenient and costly to consumers; it has given our foreign competitors an unfair advantage.

    No other industrialized country still regulates its financial system this way. Europe has long allowed its financial houses to offer banking, securities and insurance services. And even Japan reformed its version of Glass-Steagall last year. We are now the only developed country in the world that has not lifted the barriers that segregate financial services. And this is more ironic, because the United States through the World Trade Organization, the IMF, the Treasury and the Commerce Department advocates free and open markets and financial reform throughout the world, but we are not applying that same principle with the same urgency here at home.
 Page 14       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    In the absence of comprehensive reform, we have had piecemeal changes such as the easing of restrictions on commercial banks which has allowed them to offer some securities services. But because no similar opportunity exists on the securities side of the equation, a one-way street has been created in which banks can purchase securities firms, but securities firms cannot buy commercial banks.

    For example, Chase or any large bank around the world can buy Merrill Lynch. But Merrill Lynch cannot acquire a large bank either here or abroad. So our regulatory system is not only out of date, it is out of balance. One result is that over the past two years, 40 U.S. securities firms have been purchased by American or foreign banks, and this one-way consolidation is accelerating.

    Eighteen months ago, Bankers Trust purchased Alex Brown, our Nation's oldest securities firm. And then last fall, Bankers Trust was acquired by Deutsche Bank, creating the world's largest financial services institution. The recent introduction of a unified European currency has triggered more consolidation. Our colleagues across the Atlantic are creating larger, more highly capitalized companies that are better equipped to compete, and this is certain to have implications for American firms.

    We are at a historic juncture. Congress has a unique opportunity to act to preserve American financial leadership, and I am confident that you will act because of the constituency for modernization. It includes every American who owns a mutual fund, who has purchased an annuity, who wants a checking account with a good interest rate, or who holds an insurance policy. In fact, the Treasury has estimated that reform would save American families more than $15 billion a year.
 Page 15       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    The consensus for action is now so strong that all the remaining issues appear resolvable. If fiercely competitive financial firms can set aside their parochial interests and achieve consensus, surely our Government agencies can do the same.

    For the sake of the Nation, all of us need to focus less on turf and more on common ground. Mr. Chairman, the situation is serious and straightforward. If we do not reform our financial service laws, there will be a price to pay in American economic leadership. The world's financial system is now being reordered for the next 25 years. Our choice is simply to lead, follow, or get out of the way, and I think we should lead. Thank you very much.

    Chairman LEACH. Thank you, Mr. Komansky.

    Mr. Patterson.


    Mr. PATTERSON. Thank you, Mr. Chairman. I, too, am pleased to have the opportunity to testify before this committee today on behalf of the Financial Services Council. The council differs from other organizations that will come before you, because it represents the views of companies active in all sectors of the financial services industry. Our membership includes banks, securities firms, insurance companies, and diversified firms that engage in both financial and nonfinancial activities. We compete head to head, but we share the conviction that fundamental reform of America's financial laws is essential.
 Page 16       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. Chairman, unlike the case in prior testimony before this committee, I do not think it is necessary to dwell on the basic arguments for reform of Glass-Steagall and Bank Holding Company Acts. The intellectual and practical cases for ending the artificial segregation of financial services activities are now virtually unchallenged, whether by market participants or policymakers. The question now truly is how, not whether, to achieve this final reform.

    In that vein, I would like briefly to reinforce three points made in my written testimony: First, the degree to which with accelerating speed the market is demonstrating the need for legal reform; second, the importance of building into any legislation sufficient flexibility to anticipate the inevitable continuing rapid changes in technology and financial services; and third, the importance of seizing the current opportunity of industry consensus and legislative momentum without becoming derailed by disputes about exactly how and by whom diversified financial services providers will be supervised.

    The first point to emphasize is the rapidity of the convergence and consolidation of financial services both in the U.S. and abroad. As a result of developments we are all familiar with, involving information technology, institutional savings, product innovation and customer preferences, banking, securities and insurance products are increasingly similar and competitive with each other, and it is inefficient and very costly to providers and customers alike to separate their provenance. Even within the constraints of current U.S. law, the market has reacted dramatically.

    Mr. Chairman, just since the beginning of 1995, when you took the chair of this committee and declared financial services modernization to be your top priority, over 20 banks have started so-called Section 20 securities affiliates, scores of banks have expanded their mutual fund and insurance activities, securities firms have become important competitors in the syndicated loan market and many firms have sought thrift charters to provide banking products.
 Page 17       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    In addition to these individual firm efforts, the convergence story is dramatically illustrated in the merger and acquisition activity across traditional industry lines. Taking into account only transactions with values exceeding $1 billion each, since the beginning of 1995 there have been $224 billion worth of M&A transactions globally across banking, broker-dealer, asset manager and insurance lines. These diversifying transactions constitute about a quarter of the value of all M&A transactions within these industries.

    Incidentally, during the same period, there has been a total of over 280 acquisitions of U.S. financial services companies by foreign acquirers with a total value of $56 billion. The point is simply that the gap between U.S. law and market reality and sound policy is growing wider every day.

    To come to my second point, the progress that financial services providers have made in adapting to market forces has been facilitated by regulatory initiatives but at a painfully slow pace, retarded by lengthy litigation and encumbered by burdensome restrictions and limitations. The loss of benefits of competition and convenience to consumers as well as the loss of economic value to U.S. financial services companies has been enormous.

    There is no reason to believe that the pace of change will be any slower in the future than it has been in the recent past, or to believe that we can predict just what that change will be. Any legislative reform, therefore, should put a high premium on flexibility for financial services providers to respond promptly to changing customer needs. Legislation that impedes this adaptability because of insufficiently broad definitions of permitted activities or cumbersome approval processes or disputes about regulatory jurisdiction will weaken our financial system.
 Page 18       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Finally, now is the time to act. For many years, those of us who sought reform were told by legislators that we industry participants needed to get our act together first. We have largely done that. H.R. 10 reflects an unprecedented consensus among previously warring industry segments; one that was laboriously achieved and cannot necessarily be counted on indefinitely. It is particularly frustrating to see such remarkable progress by the industry thwarted by disputes over issues of regulatory oversight.

    I don't mean to trivialize those issues, they are important and some are difficult, but we ought not to keep our best teams off the field, because we can't agree on the referees. Market forces have largely broken down the economic barriers and differentiation among historical industry segments. It would be worse than ironic for obsolete legislative barriers to be preserved for lack of agreement about how to adapt the regulatory structure to the reality.

    Thank you, Chairman Leach, for your perseverance and leadership in this effort and again for the opportunity to testify today.

    Chairman LEACH. Thank you, Mr. Patterson.

    Mr. McCoy.


    Mr. MCCOY. Good morning, Chairman Leach and Congressman LaFalce, Members of the committee. I am John McCoy, President and CEO of BANK ONE Corporation. We at BANK ONE are extraordinarily pleased that the House Banking Committee is taking up H.R. 10 so early in the 106th Congress. We pledge our continued support for financial services reforms. We believe this legislation accomplishes many critical and necessary objectives for this country's financial services industry relative to the international markets. H.R. 10 also levels the competitive playing field for insurance companies, security firms, banks inside our national borders.
 Page 19       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Since this committee last took up H.R. 10, tremendous changes have occurred in the marketplace. CitiGroup was created, Deutsche Bank has agreed to acquire Bankers Trust, a slew of new thrifts and bank charters have been granted by the OTS and OCC, and BANK ONE has doubled in size. The accelerated pace at which the financial services industry here and abroad is consolidating is mind numbing.

    This strong rush of affiliation among financial services companies demonstrates this Congress' immediate need to act. If not, the Congress and many U.S. institutions are going to be left behind. We know that the marketplace waits for no one and we applaud your understanding and appreciation of the big picture at stake here.

    As most Members know, BANK ONE played an active role in the negotiations which greeted the Chairman's markup vehicle that you have before you. During the last Congress we worked closely with this committee, the House Commerce Committee and the Senate Banking Committee to assist in working through the many compromises required among the competing interests in the financial services industry to make H.R. 10 a reality.

    We believe that the product you have before you enjoys the support of most banks, insurance companies and agents and securities firms. Some of this support has been provided reluctantly as negotiations among these traditionally warring industries were not easy. Nevertheless, as you will learn over these next three days, H.R. 10 has broad based U.S. business support, including the three industries most directly impacted.

    At least four issues, however, remain very contentious. I want to take this opportunity to review them with you and give you some insights as to BANK ONE's position regarding each issue.
 Page 20       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    First, bank operating subsidiary powers. BANK ONE finds both the complementary and competing natures of the relationship between the two primary regulators, the Federal Reserve Board and the OCC, to be healthy and beneficial to bank holding companies in the national bank charter. We believe that this check and balance relationship provides the flexibility required to successfully move U.S. financial services firms into the next millennium. The bill you have before you restricts bank operating subsidiaries to engaging only in; one, any activity permitted for national banks themselves; or, two, any agency activity authorized for a financial services holding company. The Chairman of the Federal Reserve and the Secretary of the Treasury have and undoubtedly will continue to debate whether or not these restrictions are appropriate.

    BANK ONE's position is that national banks can and will effectively accommodate whatever resolution to this debate prevails. However, we do not believe that this issue is of a magnitude that should stop H.R. 10 from moving forward. BANK ONE strongly believes that before the operating subsidiary issue is permitted to derail or destroy H.R. 10, this Congress should respectfully adopt a King Solomon's judgment and offer to split the baby and lay the issue to rest.

    Second, regarding the Community Reinvestment Act. As the 105th Congress was brought to a close, H.R. 10 failed to reach the Senate floor, primarily, we believe, because of differences of opinion as to the bill's impact on CRA. Frankly we believe that were this committee to take the pulse of the 535 Members of Congress regarding CRA, you would probably encounter 535 different opinions as to how it should be reformed.

 Page 21       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    BANK ONE is, we believe, working effectively and successfully with CRA. CRA's bottom line objective is BANK ONE's bottom line objective: use bank products and services to strengthen communities and families across all of this country's diverse demographic groups.

    How banks' bona fide business objectives and Community Reinvestment Act and related regulations intersect is the topic of much debate. So much debate involving so many policies, procedures and interested parties, that we do not believe the issues can be adequately addressed in anything other than a stand-alone bill.

    BANK ONE does not oppose CRA, nor do we have any blockbuster ideas as to how it could be made more compatible with the will of Congress. We are, however, ready and willing to work with you to reform what began as a very short and simple bill passed in 1977 and now has become a myriad of competing concepts and regulations both inside and outside this Congress. We think, however, that this debate should take place separately from H.R. 10.

    Third, the mixing of banking and commerce. Under current law, insurance companies, security firms, mutual fund companies and some thrifts may affiliate with commercial firms. Only banks must remain separate from commercial endeavors. BANK ONE realizes that many Members of Congress, including most importantly this committee's esteemed Chairman, are fearful that the mixing of banking and commerce would result in an unacceptable concentration of power on Main Street and Wall Street.

    However, BANK ONE does not interpret the economic history of this country, and the experience of foreign firms currently engaged in both banking and commerce, in the same way. We believe that, regardless of lines heretofore drawn by Congress, the distinctions between financial services and commerce grow fuzzier every day, particularly in the area of electronic commerce.
 Page 22       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    We are confident that the proposals that Congress has considered to mix banking and commerce could be safely and soundly executed by this Nation's financial services companies and commercial firms. We are equally confident that such affiliations can be safely and soundly regulated by the Nation's regulators without risking the creation of oppressive concentrations of power that some Members of Congress feel.

    We understand that informed, honorable people and institutions are of different minds on this issue. We also understand the changes usually come in inches not yards. We respectfully request that H.R. 10 include an opportunity for this Congress and the banking system to gain some actual experience and empirical evidence with the mixing of banking and commerce. We believe that this experience will not be as positive as some project nor as negative as some fear.

    Fourth, regarding consumer privacy. Comprehensive consumer privacy provisions are not and should not be included in H.R. 10. Very few people understand the depth and breadth of the issues inherent in this topic or the potential consequences of any Government action for consumers, banks and the entire national and international economy.

    Let me also add that, unlike other industry, banks and other financial institutions are already subject to extensive privacy regulation. In the last 30 years, Congress has mandated our compliance with a web of privacy laws that create real protection for customers, including the following:

    We are required by the Fair Credit Reporting Act, which Congress recently overhauled, to abide by strict rules governing the sharing of information obtained from customers in the credit-granting process.
 Page 23       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    We are required by the Electronic Fund Transfers Act to disclose to customers our policies for sharing information about their accounts with third parties.

    We are required by the Federal Trade Commission Act to abide by the terms of privacy policies we adopt for customers, and BANK ONE, like most banks, has in place a privacy policy. Having said all of this, I confess to you although I actively seek more and better information every day, I remain overwhelmed by all that I don't appreciate about what might constitute appropriate and desirable consumer privacy policies.

    Part of the problem is that consumer privacy is an intensely personal matter and one that may be changing as technology evolves. One thing that cannot change is the foundation of trust upon which the financial services industry is built. Were we to lose that trust, BANK ONE could not exist. For this reason, we recently appointed a senior vice president to focus only on the privacy needs and expectations of our customers.

    This office will also compare our practices against those of other financial firms, as well as other service providers, such as telecommunications and retail firms. And in focusing on the consumer privacy issue, it is important to remember that the effective use of consumer data is not unique to financial services companies. It is an essential element of the business of successful companies throughout our economy that are seeking better products and services for their customers.

    BANK ONE believes we can learn from the many proposals being deliberated by various congressional committees, business committees and alliances, consumer groups and the international economic community. We don't have the answers yet. And like the Administration, we are fearful that restrictive governmental action will cripple the emergence and growth of new technologies, Internet commerce and new consumer products and services.
 Page 24       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Given the embryonic stage of these privacy issues, we implore the Congress to move at a slow and deliberate pace seeking the full understanding of the implications of any action before it is taken.

    BANK ONE does not believe that issues such as consumer privacy, which have such enormous consequences on national and international trade and commerce, as well as for tens of millions of consumers throughout our Nation, can be dealt with adequately as a sidebar to financial services restructuring.

    Again, thank you, Mr. Chairman and the Members of the committee for moving so persistently and aggressively for financial services reform. BANK ONE is committed to working with you and passing H.R. 10 this year.

    Chairman LEACH. Well, thank you, Mr. McCoy.

    Mr. Huber.


    Mr. HUBER. Thank you, Mr. Chairman, and Members of the committee. I am Richard Huber, and I am Chairman and CEO of Aetna, Inc. And I am very pleased and honored to be able to testify before this committee and share with you my perspective on financial services modernization based on, first, my experience in international banking for some 29 years and, more recently, my experience in the insurance field.
 Page 25       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    I am confident that all of us on this panel agree that the legal and regulatory structures under which we compete, and let me tell you, we compete aggressively, are outdated and fraught with exceptions. I am just as confident that we would all agree that marketplace pressures and varying interpretations of law by regulators and the courts have intensified competition. I think we all agree as well that the consolidation of firms and expansion of product offering both domestically and abroad will continue to take place.

    The reality is financial services modernization may occur de facto. Action is critical; the rapid evolution of banking, securities and insurance will not cease. And I have said modernization will happen with or without legislation. Restructuring the global financial industry will continue and, unfortunately, if Congress cannot pass meaningful reform, American institutions will remain handicapped by antiquated laws.

    I have personally been involved in advocating financial services modernization for almost 20 years, and I have to admit that there have been many times when I doubted that Congress would find the courage to act within my lifetime.

    Last Congress, you achieved what many observers thought to be impossible. For more than a decade, we and others in the industry argued that consumers and markets would benefit by unshackling the financial services industry from its 60-year-old legal structure. But as you well know, to be completely honest, the internecine warfare within the financial services sector was just as vociferous.

    This committee and the 105th Congress successful negotiated a ceasefire within the financial services sector. You developed a legislative package that allowed each industry to put aside parochial differences and find common ground. The common ground can't be lost as you move forward. H.R. 10 achieved a tricky balance in reforming the regulatory framework by enhancing our competitive position abroad, while at the same time advancing domestic competition.
 Page 26       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    The insurance industry supported H.R. 10, because it embodied our main goal, making certain that banks entering insurance business be subjected to the same statutes and regulations that insurers not affiliated with banks must observe.

    The insurance sector wants to slow the practice of Federal banking regulators granting insurance authority to banks without any of the solvency and other regulatory requirements of the State. Our goal is to level the playing field, not to seek any special exemptions or competitive advantage. Equal and functional regulation is the best guarantor of competitive equality.

    One of Aetna's subsidiaries, Aetna International, operates in 17 countries throughout Asia, Latin and South America and Central Europe, selling pension, health, and life insurance products. When we enter an emerging market, we typically joint venture with one of the leading domestic companies in that country, frequently with a large retail oriented bank.

    We often find that our foreign partners are mystified by the rationale, or some have said the lack of rationale, of our financial services regulatory scheme.

    Let me share one of our foreign experiences with you, because we have seen some completely unexpected and positive outcomes which simply would not have been possible in our current regulatory model in the U.S.

    Mexico is one of our most successful markets, where we now have 16 percent of the privatized social security markets and actually 25 percent on a wage weighted basis, 28 percent of the single premium annuity market and 29 percent of the individual life market.
 Page 27       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    We partnered with Bancomer, Mexico's largest retail bank, to provide the distribution mechanism for our product. Initially, we used the traditional agency distribution network. Then in 1997 as Mexico privatized its social security system, we decided to use the bank's 1,000-plus branch network to reach the largest possible share of the market.

    Seeing the tremendous success of this model, we set up a separately chartered insurance company with the same back office as our existing company to sell inexpensive, plain vanilla auto, homeowners and life insurance through the same branch network. We expected to draw some of our agency-distributed business, but we felt it was a worthwhile experiment.

    The results were very interesting. The bank sales strategy reached an entirely new market segment, lower- and lower/middle-class Mexicans who were never reached by the traditional, higher cost distribution system. Now tens of thousands of Mexicans are participating in the insurance market, protecting their families from devastating catastrophic expenses, generating savings and creating security options.

    And in little over a year our new subsidiary became the sixth largest insurance company in Mexico with very little cannibalization of our existing agency distributed business. The phenomenon did not occur because of significant increases in discretionary income; it happened because of a different way to approach people about insurance. Ready access and long-standing trust of the bank are the explanations.

    The social impact of this is significant as there is significant potential of a strengthened lower/middle-class in Mexico. The outcome would not be possible in the regulatory structure similar to ours. Increased economic security is part of the outcome in Mexico, and more funds channeled into productive sectors of the economy. Perhaps it could be one of the consequences of financial services modernization in this country. I will leave the discussion of lessons learned in our numerous experiments with privatizing social security for another debate.
 Page 28       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    In closing, Mr. Chairman, I want to once again commend you for holding this hearing and for starting this process so quickly in the new Congress. I offer you my support and assistance moving H.R. 10 forward, and I wish you and your colleagues on the committee the necessary diplomacy, energy and commitment to maintain the delicate balance required to pass H.R. 10 in the 106th Congress, within my lifetime.

    Thank you.

    Chairman LEACH. Well, thank you. And we hope you have a long life.

    I just have one question. But before raising it, I want to make a clarification, and it relates to Mr. McCoy's extraordinarily thoughtful presentation. But there is an element of straw man that I want to put down, John, and that is the bill before us authorizes bank holding companies the right to engage in activities, financial in nature, which is a broader definition than currently applies of incidental to financial.

    The legislative history that we very carefully developed in the last Congress was to underscore that this applied to electronic issues and so the basket is unneeded to protect activities that move into the electronics nature. There has been a lot of discourse in recent weeks with the example given of American Express and their ownership of some travel magazines, that American Express being the financial company but disproportionately more travel oriented than some other companies.

 Page 29       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    In my view, that would fall under the rubric of incidental to finance. But I am very open to the new discussion about adding to the authority of the Federal Reserve Board of approving activities complementary to financial services. And I think that covers it very extraordinarily.

    But let me come back to the basket and to make this distinction in the American Express example. If BANK ONE wanted to buy the Cleveland Plain Dealer, I would consider that outside of incidental to banking and complementary to banking. But it would be allowed under baskets. And that is a distinction that, in my view, would be very inappropriate for a financial institution to enter into. And it is a limit placed on the financial institution. One might argue banks do put advertisements in newspapers, as do many other aspects of commerce.

    But it is an example of where I think baskets could lead to what I believe would be inappropriate, whereas flexible language involving ''incidental to'' or ''complementary to'' would be of a more common sense direction. And I just throw that out. And frankly, we may have a difference of judgment on that, and I recognize that, but that is the view that I would hold on that particular issue.

    But the question I want to ask is simply one that relates to the position of the United States in the international marketplace. Mr. Komansky, do you believe that the Merrill Lynch Company is better positioned to compete internationally with or without legislation before us?

    Mr. KOMANSKY. I think clearly our position would be enhanced with the legislation that is before us.
 Page 30       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Chairman LEACH. Mr. Patterson, would that apply to your company?

    Mr. PATTERSON. It would certainly apply to J.P. Morgan, and I believe that most of the members of the Financial Services Council, if not all, would agree as well.

    Chairman LEACH. Mr. McCoy.

    Mr. MCCOY. Yes.

    Chairman LEACH. Mr. Huber.

    Mr. HUBER. It would have relatively little impact. We are able to compete pretty well internationally, and quite frankly, it would have relatively little impact on us.

    Chairman LEACH. Fair enough.

    Mr. LaFalce.

    Mr. LAFALCE. A bit of a history. I have been working for financial services modernization since I have been in Congress. I worked closely with Mr. Patterson for virtually all of those years and certainly with his predecessors at J.P. Morgan; did not always work closely with the securities industry, because up until the late 1980's, they were not always on board.
 Page 31       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    And so I welcomed their conversion and in joining the effort, and the same thing is true with respect to the insurance industry. And we really didn't have until recently an association with BANK ONE, in particular, but banking community, it depended on which group you were with. At one time they were opposed to repeal of McFadden Douglas, and we had to bring them along, but we did. NationsBank opposed the repealing of McFadden Douglas until they were big enough to favor it, I think. So beauty is in the eyes of the beholder, but I think we have been fairly constant to our vision.

    The Chairman just mentioned something about baskets and newspapers and he points out a particularly difficult situation of course. I just want to point out that in a prior life when I was Chairman and Ranking Member of the Small Business Committee, I saw to it that because of the peculiar situation with newspapers in the media, that no SBA loan could be given to the media. They just have a sui juris position within American society, and so I don't want to take the worst possible example and use that as the model.

    We go to you, Mr. McCoy, your testimony on page 4, ''We understand that informed, honorable people and institutions are of different minds on this issue. We also understand that change usually comes in inches, not yards. We respectfully request that H.R. 10 include an opportunity for Congress and the banking system to gain some actual experience and empirical evidence with the mixing of banking and commerce. We believe that this experience will not be as positive as some project, nor as negative as some fear.''

    I think that is a very good statement. It is balanced, it is reasonable. Let me follow up with a question. What experience has your bank and the banking community, if it is not your bank, in particular, had with some fixture either internationally or domestically, for example, through an SBIC, number one. Number two, what did you mean by this moving ahead in inches? Do you have any suggestions? Is it a continuation of the unitary thrift charter or because you don't like unitary thrifts because you are a bank? Is it some modest mixture, you know, where you are talking about some percentage less than 15, or do you have something else in mind?
 Page 32       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Two-part question, the first part is the existing historical experience, the second is the future experience that you would like to see.

    Mr. MCCOY. The experience that we have had dealing in commerce is very limited. Usually when we deal in commerce, it is because we made a bad loan and we end up taking over the company. So I am not sure that that is good experience. We have had experience in venture capital, which is an area, I think the area of commerce that I would——

    Mr. LAFALCE. What has your experience been in venture capital in an SBIC?

    Mr. MCCOY. We have had SBICs. Both BANK ONE and First Chicago have a history in venture capital investments.

    Mr. LAFALCE. That is something I have a lot of experience in too, dealing with the small business community, we have had bank SBICs separate affiliates for decades and decades and decades, and they have done great things with virtually no downsize.

    Mr. MCCOY. Exactly.

    Mr. LAFALCE. Go ahead.

    Mr. MCCOY. You have answered my question. I think the—and I would say that as much as I like the Plain Dealer, I have no interest in acquiring the Plain Dealer. The area on the commerce side that is most interesting to me is what is happening on the Internet. And the Internet is a total new game——
 Page 33       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. LAFALCE. I want to say when I see some of the institutions that have bought media today, you would be a lot better than some of those that presently own them, OK.

    Mr. MCCOY. But I think on the Internet, this ability to be an aggregator, what is our relationship with Yahoo? Can we be a website where people are coming to us to get to other commercial sites? So that is a very important area to me. What are inches? We have grown in our position inch by inch. And so I don't know whether 5 percent is the right number, I don't know whether 10 percent is the right number. I certainly am not for 100 percent, I think it has to be limited. And we will learn. And I will tell you that there will be mistakes made, but I think there will be real gains that will accrue from it.

    Mr. LAFALCE. Thank you.

    Chairman LEACH. Thank you.

    Mr. McCollum.

    Mr. MCCOLLUM. Thank you very much. I might comment on the newspaper analogy that Intel, Microsoft, Lockheed Martin, if they started buying newspapers, I suspect we would be just about as concerned or more than if banks did.

    Mr. Komansky, you mentioned, speaking of consolidation, that I think that 40 security firms, U.S. security firms have been acquired by banks since we changed the law in 1997. Has this had any negative impacts, as far as you know or has it increased competitiveness? Has it been positive? Negative? How do you view that?
 Page 34       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. KOMANSKY. Well, I will clearly say it has had positive effects on some of the major banks that acquired securities firms, but negative effects on pure securities firms that have to compete with those much larger entities.

    Mr. MCCOLLUM. What has it done for the consumer?

    Mr. KOMANSKY. I think that is still yet to be proved. Personally I think in the end the question of competition will determine that. I have no problem with competition. In fact, that is what affords us the opportunity to do what we do. But I do think it is imperative that we have the opportunity to achieve the size and scale to be able to compete with much larger entities.

    The combination of a major bank with a securities firm results in a multitalented entity with a huge financial capability. On the other hand, a typical or even the largest investment bank from a financial point of view, a balance sheet point of view, cannot achieve the same capability. So we do without question feel that we have been playing on a playing field that is tilted against us.

    Mr. MCCOLLUM. But if H.R. 10 is passed that will level that playing field to a largest extent and the competition that has actually probably grown a little bit with the banks acquiring the security firms will continue to occur more broadly based actually?

    Mr. KOMANSKY. Clearly if H.R. 10 or a modernization bill were passed, it would certainly then make it possible for firms such as Merrill Lynch or some of the other major investment banks to at least attempt to level the playing field and not be blocked by legislative barriers.
 Page 35       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. MCCOLLUM. Mr. Patterson, you mentioned that you believe that financial holding companies should be permitted to conduct de minimis nonfinancial activities. I am just curious what you think of when you think of the term de minimis?

    Mr. PATTERSON. In my testimony, Congressman McCollum, what I was stressing was that the definitions of permitted activities be broad enough through the Fed's interpretive power under the rubric of incidental and complementary, as Chairman Leach has mentioned earlier, to include activities that might not by themselves be viewed as financial, but are incidental to and complementary to financial activities.

    The Financial Services Council philosophically would support a mixing of commerce and banking, but for purposes of our comments on H.R. 10, it is the former point I was trying to make.

    Mr. MCCOLLUM. Well, I understand it. The only reason I ask you is de minimis has a lot of different connotations. We are dealing with that term quite a bit here. And I didn't mean to subject you to trying to give me a laundry list, but I realize it is a difficult concept to always define for our purposes.

    Mr. McCoy, you also stated something interesting to me, you said with regard to operating subsidiaries, something to the effect of let it rest and do not destroy the entire bill. I am curious what your thought process is on that. My concern is that Treasury, as you know, is very much pressing for an operating subsidiary power that we might not be as so willing to give as a committee, but ultimately we will have a bill signed into law. So I am curious what you were thinking about when you said let it rest, how do we let it rest considering that sits there with the reality of legislative process?
 Page 36       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. MCCOY. I think this contention between the Fed and the OCC is one of the more frustrating things to me as a banker. This is more of a regulatory issue that you would hope that since we do work for one Government, that you could work it out within the Government.

    Mr. MCCOLLUM. We feel that way, too.

    Mr. MCCOY. It is hard for me as an outsider to say how to do it. I think we need to reach out to both to find a way, because I think it can prevent the bill from occurring which is a negative. So I am willing to try to find that compromise. I don't think we found it last time. I hope with this bill that is going to come out this afternoon, there may be a way to get some compromise there. And I think——

    Mr. MCCOLLUM. I yield certainly to Mr. LaFalce.

    Mr. LAFALCE. Treasury has come a long way. Basically the provisions with respect to operating subsidiaries is the one that was offered by Congressmen Vento, Bentsen and myself on the floor last year, that Treasury wouldn't support, because its authority for operating subsidiaries was not broad enough. We did not change; Treasury changed. And they have made major concessions in arriving at the point where they now can support that limited operating subsidiary authority.

    Mr. MCCOLLUM. As my time is up, but I yielded, I would like to make the one comment and that is, Mr. McCoy, and others, I think as opposed to the last Congress, when I sensed the issue of modernization wasn't ripe in the sense that we had such an uphill climb to go, I think in this Congress it is ripe, and I think we are closer and this is why.
 Page 37       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    But thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. McCollum.

    And let me just say to my colleagues we are going to try to stick fairly rigorously to the five-minute rule and one of our panelists definitively has to go at noon, and that is understood.

    Mr. Vento.

    Mr. VENTO. Almost all of these—well, I mean to the witnesses that addressed it, I will address the issue of, in this panel, as I understand it, the relationship between commerce and banking and that they are inextricably tied. I was interested, Mr. Chairman, in your example of the Cleveland Plain Dealer and was wondering if you know as a banker you made the loan, and then it was a default, and then you would become an owner of it. Besides which, of course, I can think of a lot of problems with the Cleveland Plain Dealer being owned by a large entity of any sort, in terms of what it might mean. There has been obviously a lot of concern about various personalities of the news media, as Mr. McCoy I think was referring to, or others.

    But I just think that from what I am hearing here from this panel or what I read in the testimony of others, everyone seems to understand that, you know, we can't talk about commerce and banking, it is like talking about the king's new clothes; you know, it is there, but we have to pretend as though it is not there. And well, I might have had some reservations over the years that we move in this direction. I mean I look at this litany of examples of exceptions that we have and wonder why we aren't addressing this. It might make someone feel good, but I think the reality is if you choose not to embrace or deal with it, that we, in essence, are not doing as precise a job as we can legislatively and giving direction then to the regulators as to what the nature of the proportion of this and the relationship ought to be in the sort of stated denial here with the facts of the marketplace.
 Page 38       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    I mean does anyone on this panel think that we should require brokerage or insurance that have an equity investment not to be able to have a bank—a holding company affiliate?

    Mr. Komansky.

    Mr. KOMANSKY. No, I would like to try to adjust that. Our concerns about commerce are basically focused around our capital raising activities on behalf of clients, which could take the form of either venture capital investment or merchant banking forms. And, in fact, there are even certain techniques of raising equity in the public markets, where we would stand as an intermediatory and for a period of time could well technically have a large percentage of the equity holdings of that company in our ownership at our risk until we can transfer that risk into the public markets. So we would be concerned about those activities are treated.

    In addition, the other set of activities we would be concerned about are investments that we make, particularly nowadays, in the information services area. We happen to have been the original investor in the Bloomberg News Service. The motivation behind doing that was that we needed the development of those systems for our training rooms, and that is how that started.

    Today, in this day and age, with the activities of Silicon Valley, it is critical for us to be able to have alliances with small software companies, developmental companies out there, who, in essence, can help us develop proprietary software, proprietary applications. So our particular—and I think this goes for much of our industry—concern when it comes to commerce is not the example of owning the newspaper, but is more in line with those activities that Chairman Leach outlined as complementary to our business.
 Page 39       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. VENTO. I am not so clear if that language is going to get you to where you are at. I understand you don't want to divest of those particular equity investments, they are a necessity, they are part of doing your business in terms of offerings and so forth, but banks would be restricted.

    We saw this in the last bill by providing a 15-year grandfather for insurances and brokerages and no grandfather and no opportunity for banks, which is sort of interesting. I guess if you happened to open a securities firms, you are all right.

    I had a question on the securities side. For 15 years one of the issues on the insurance side deals with this umbrella of regulator in terms of the Fed being the ultimate determiner when there is a bank affiliate insurer type of relationship. And under current law, State insurance regulators have authority to approve, disapprove a condition of a transaction under which control of an insurer would change.

    H.R. 10 would modify that and give the Fed the control and basically pull out the State regulator. Now we don't have a national insurance regulator, much to the chagrin of some and to the applause of others. In any case, they would be entitled—State insurers would still be entitled to notice, but that would be beyond these, however. They would have to appeal to the Fed if they wanted to change a Fed decision. This basically set the Feds up as a de facto in the national regulator.

    Mr. Huber, do you have any comments on that to help us? No guidance for them incidentally in the bill as to how to make this issue.
 Page 40       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. HUBER. I think that the ACLI and the insurance industry as a whole is debating within itself whether really we should continue to favor State regulation or support some form of Federal regulation. There are pluses and minuses on both sides, and this is still something that is being debated very actively. And believe me, going around as I am now to something like 31 States to get an approval for an acquisition, there are days when I wouldn't totally mind having some form of Federal regulation. But this is still something that is being discussed and I think it would be premature to comment on it.

    I would like to make one final comment, though, on the commerce issue. We have one of the most relentless, ruthless regulators known to man. It is called the investor community. And the investor community has told us loud and clear that they want us to focus, focus, focus. They have led us to divest a number of businesses that were insurance businesses, but they were not related to our core business.

    And to me, this is the biggest regulator that I have, the guys who buy and sell my stock, and they tell me in every way that they want us to focus on the very few businesses we are good at and get out of everything else.

    Mr. VENTO. Thank you.

    Chairman LEACH. Mrs. Roukema.

    Mrs. ROUKEMA. Thank you, Mr. Chairman.

 Page 41       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Some of my questions have been asked by Mr. McCollum or have referenced by Mr. LaFalce. While we seem to be making progress here, I don't think I have gotten quite the specificity that we might have. I do understand that we want to get a bill. But I am still concerned, I believe that the question between the Fed and the Treasury in terms of operating subsidiaries is more substantive than I think has been thus far described by any of you. I don't quite know how we split that baby in half.

    But I do think that there are substantive issues about going into this new world where a Fed—a holding company pattern provides more safety and soundness assurances than some of the other proposals. If anybody would like to speak with more specificity on that, I would really appreciate it. I think we are all making a practical, maybe a programmatic approach. But I am not sure that we have defined how we split that baby in half, and it ain't that easy I am afraid, because we have been toying with this for a long time.

    But the other question is the question of the commercial basket, and I know now we are—that is a dirty word now, basket, we are talking about complementary activities and ways of compromising that. And I am all for that, if we can. However, I heard your answer to Mr. Leach, and my question is, I don't know that common sense necessarily will solve the problem as to how we get to a definition of those complementary activities without—because I see it—we laid a problem out there, is that it would become so convoluted and discretionary in terms of regulation that I am not quite sure.

    Could anyone here be a little more specific about what you mean in that regard, commercial complementary activities? Anyone? Mr. Patterson, please.

 Page 42       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. PATTERSON. I am not sure that this is going to be as specific as you would like. But I have been thinking about Chairman Leach's tantalizing example of the Cleveland Plain Dealer. Clearly in today's world that would appear to everyone not to be a financial or even related to financial activity. And yet I think we all know that the way news is delivered to consumers in the future may easily be changed by developments in electronic technology.

    Banks and other financial intermediaries deliver a lot of information to their clients and their consumers increasingly using electronic technology. Indeed, there are many who think that the real future of financial intermediaries is in providing advice and information rather than commoditized traditional financial services. Would a bank that provides a vast amount of financial information to its customers and decides to add general news to that delivery of information be engaged in an activity that was not complementary to its financial activity?

    I think there is at least an issue there, one that will have to be dealt with in the future in the context of future technological developments. And I simply wanted to make the point earlier that through words like complementary, which cannot be defined with precision now, we introduce into the bill enough flexibility to deal with those changes in the future.

    Mrs. ROUKEMA. Mr. McCoy or Mr. Komansky? And could any of you relate it to the future? After all, we are talking about global economic competition and we already have Deutsche Bank out there. Yes, Mr. Komansky.

    Mr. KOMANSKY. One of the things I think that we have to try to keep in mind, as I said earlier, one of our concerns was the ability to retain the ability to make investments in Silicon Valley for research and development and for access to systems and technology. If we had had this conversation three to five years ago, this would have been the furthest thing from our minds and something we certainly at that time would not been involved in nor had very much interest in being involved in.
 Page 43       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    But it goes I think to what Mr. Patterson said, the changes that we are experiencing in the marketplace, both because of the advent and the advances in technology, the issues that are brought about by globalization and that are then exacerbated by piecemeal deregulation around the world, almost preclude what you are searching for. I understand why you are looking for specificity.

    But to be able to forecast the impact all the changes our industries will experience at this point in time is frankly almost impossible. That is why I too favor flexible language and hopefully some sort of guidance to the regulatory body of the intent of Congress. I think it is going to be very difficult to look to the future with a real degree of preciseness.

    Mrs. ROUKEMA. Thank you. I don't know whether the Chairman would give Mr. McCoy a minute.

    Mr. MCCOY. I would agree with David very much. I think that just what we have seen happening in the Internet in months changes what we may want to do. And so I think we are going to have to depend on the regulators to define that term, because ten years from now, what we will be doing I think will be very different. And I think to have that term not precisely defined, but trusting in the regulators, is a better way to go.

    Mrs. ROUKEMA. Well, perhaps I have another question at another time. Thank you. That has been helpful. It has been helpful.

    Chairman LEACH. Thank you.
 Page 44       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. Kanjorski, let me say, we do have a vote on. It is your choice. Do you want to return?

    Mr. KANJORSKI. Yes.

    Chairman LEACH. The hearing is in recess, subject to the vote.


    Chairman LEACH. The hearing will come to order.

    Mr. Baker.

    Mr. BAKER. Thank you, Mr. Chairman.

    I have a series of questions. I know the panelists are well pressed for time, so hopefully your responses can be as succinct as possible.

    Mr. Patterson, on page 11 of your testimony, you basically describe an interest in some non-financial activities that might be included in reform measures. You do go on to qualify, subsequent to page 11, that it might be necessary to regulatorily restrict those non-banking activities, but certainly we should look at those being some—in some scope permissible.

 Page 45       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Under the Bank Holding Company Act, Section 4(c) in the series that follows current law provides for equity investment in a domestic corporation up to 24.9 percent of domestic company ownership, non-voting. I find, and always have found, it to be highly ironic that the same provisions allow a bank holding company to own up to 40 percent of a foreign corporation.

    Why is it inherently more safe for the U.S. taxpayer and a bank holding company to own 40 percent of a foreign corporation as opposed to 24.9 of a domestic corporation? Is that a problem?

    Mr. PATTERSON. Well, in answering your largely rhetorical question, I obviously have to agree with you that there seems to be an inconsistency there.

    Mr. BAKER. Thank you. If you wish to expand on——

    Mr. PATTERSON. I was simply going to point out there are many inconsistences under current law in the treatment of banks and bank holding companies in terms of what they can do in this country as opposed to abroad.

    Mr. BAKER. Mr. McCoy, you cite the need for empirical evidence with regard to the mixing of banking and commerce in order to make judgments as to how far each step should be taken and, therefore, how many steps.

    What more empirical evidence do we need than to look with regard to the unitary thrift charter with over 30 years of experience with hundreds in line now waiting to get their hands on that charter to determine whether there is some inherent risk in the mixing of banking and commerce that has shown it to be inherently more risky to the taxpayer or to the marketplace?
 Page 46       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. MCCOY. I am simply a banker and very cautious. That is how I would always state my position. I think there is a lot of information out there that says that we can move forward.

    Mr. BAKER. The failure rate of unitaries has not been any better or any worse than any other traditional international institution; is that correct?

    Mr. MCCOY. Correct.

    Mr. BAKER. Thank you.

    Mr. Huber, I don't know if it is still the case, but could you verify whether Aetna still is the owner of U.S. HealthCare's HMO?

    Mr. HUBER. Correct, we are.

    Mr. BAKER. After the review of your investors—that scrupulous, difficult group of regulators that you cited—looked at the business enterprises in which Aetna is engaged and determined that the ownership of an HMO was not only in the company's best interest, but frankly good public policy. The other information that I have ascertained is that at least in 1996 Aetna's revenues, 14 percent of your stream came from commercial activities.

    Under the proposal as we are now contemplating a divesture might be necessary to fall under the revenue limits. Would it serve anyone's best public interest, taxpayer, consumer or otherwise, to force Aetna to divest of U.S. HealthCare's HMO?
 Page 47       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. HUBER. Well, I certainly wouldn't think so. And, of course, we were in the HMO business before and that was just really an expansion of our activity in that field.

    Mr. BAKER. But your market regulators have found it to be an appropriate mix of business and finance?

    Mr. HUBER. Indeed.

    Mr. BAKER. Thank you.

    Mr. Komansky, there is also considerable discussion about the structure of how securities underwriting should be handled. Do you feel it inappropriate for securities underwriting to be within the op sub of the bank structure or should it be forced out into an affiliate?

    Mr. KOMANSKY. No, I don't think it is inappropriate at all. As a matter of fact, we could operate under either structure.

    Mr. BAKER. But for an entity which may not have the financial resources or management skill which your company obviously has, would it not be of some economic advantage for the smaller entity to be able to engage in these activities without the cost of the affiliation structure? It might help a competitor.

 Page 48       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. KOMANSKY. It might be, it might be.

    Mr. BAKER. Thank you. I yield back my time, Mr. Chairman.

    Chairman LEACH. Thank you. Before turning to Mr. Kanjorski, because I don't want Aetna's stock to drop, I think it should be very clear under this bill they will not be required to divest their HMO.

    Thank you.

    Mr. Kanjorski.

    Mr. KANJORSKI. Thank you very much, Mr. Chairman.

    I guess the observation I want to make is that the banking industry has never been more successful or profitable. We are in a better competitive position than any other industrial Nation in the world with our banking system. We used to hear the argument that bankers needed modernization because they were having their markets sucked away from them. Now we hear in arguments this morning that the securities industry needs it because they are at an unfair disadvantage with banks who are, through regulation, able to participate in activities that the security industry is unable to do.

    Why are we here? What is this tremendous compelling interest? Is it the fear that we will not be competitive? Are we about to lose our position economically in the world? We have not yet examined the results of Japan and Germany to know whether mixing commerce and banking may have some fundamental flaws. Have we done away with greed? Have we anticipated that the capacity to mix banking and commerce with the ingredient or disease of greed may cause problems in the future? Has that disappeared? I am not sure that I have overwhelmingly heard an argument here regarding why we have to change.
 Page 49       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    I tend to agree that if it is not a good change and not good modernization, than we should probably do nothing. We are not necessarily in a disadvantaged position around the world, unless I misread the current bank stock and the securities industries stock reports. Everybody is just filled with money right now.

    The other problem that really disturbs me is that in the testimony I heard, nobody addressed the social impact of what this will mean on small- and medium-sized communities as well as the acquisition of small- and medium-sized banks and other businesses. I fear that the unitary thrift charter experiences are not the type of a result that we can anticipate by tearing down the firewalls.

    When I supported interstate banking just a few years ago, in a district like mine we went from 60 community banks down to about two. We now only have huge national banks and a few regional banks that are about to be picked up, leaving nothing but very huge national banks. Why isn't it reasonable for me to assume that the same thing will not happen if we allow the banking industry to invade the commerce field? Why will there not be regional banks that become vacuum cleaners of successful businesses and then get bought up by other entities or join other entities on a much larger scale?

    How can I assume that at some point we will not run into the problem that for divestiture purposes we will kill off a company that is financially successful, hires 3- or 4,000 people that are very happy, produces a good product, and for all intents and purposes is doing all the right things that our society and our enterprise system is set up to do, but does not meet the needs of the mergers and acquirers?
 Page 50       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Why can we not just anticipate that that is going to be a problem? Where has the testimony been that I have seen in the consolidation of banks in Pennsylvania and throughout the country? Thousands of executives, thousands of managers, and thousands of average people have been let go, and they have now filtered into a strong economy. But, we do not have any studies as to what levels at which they are now employed.

    I know several vice presidents of financial service industries that are now doing inventory stocking in major department stores. So, we have not seen any of those studies. Where is the expression of the willingness to be able to engage and expand, as you are all indicating we should? Are you willing to participate, up-train and up-scale either your people and see them placed well? How are you going to participate?

    Then finally, as you know, we saw a loss of leadership in our communities. When I needed something in my district ten years ago, I could call the bankers together, and we would have 50 or 60 in a room. They would be the leaders, whether it is a United Way Fund, a new school, or whatever we wanted to do. Today I call the bankers together and I am lucky if one or two show up, because there are only five or six there. They are on the road between my place and the next place because they are on their way to corporate headquarters. They really do not give an awful lot to, nor do they know much about the community. It seems to me with this merger we are talking about, in this capacity involved themselves, there are going to be less people on Main Street able to participate in the social leadership fabric of the community.

    Now, there will be some efficiencies. There will be some profits. But, what is the weight of the profits to the financial system and to the efficiencies of the economy compared to the disadvantages and losses to the community leadership, to the individuals that work, and to some of the customers that may not be important any more?
 Page 51       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    That is what weighs on my head, and I hope the next three days of hearings are going to help us get an explanation. I see my time is up, and I yield back, Mr. Chairman.

    Chairman LEACH. Thank you.

    Mr. Royce.

    Mr. ROYCE. Thank you, Mr. Chairman.

    You know, in the United States, we have enjoyed a period of time where the financial center worldwide has been in New York. We have had good capital accumulation and a very efficient banking system, but we see this evolution in Europe now, we see the euro, we see the financial services structure there, which has been liberalized to an extent where today firms from overseas, Deutsche Bank, are purchasing U.S. companies with a special exemption, the exemption that allows commercial banks to be held by a firm that is involved in commerce and involved in securities and involved in insurance and banks.

    And in addition we see other exemptions, securities exemptions and so forth, and Deutsche Bank does not have to divest itself of Chrysler or other holdings in the U.S. And it seems to me over time that with what has developed now of especially the euro, you are going to begin to see the type of heavy capitalization that we have had here in the United States, we are going to see a competitive advantage possibly from Europe. And we just begin to see the making—the first wave here of purchases of U.S. banks by firms overseas that are heavily capitalized and are able basically to utilize these exemptions under our laws and under their laws, and then come in and compete with the United States.
 Page 52       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    And my question is, over time, are we potentially at risk in terms of the financial center moving to London or Frankfurt with the development now of this new synergism in Europe, combined with the advantages that these firms have to compete with the United States, while our own financial services system is in some ways hobbled by the laws that we have put on the book here?

    I would just like to hear sort of the long-term forecast from someone on the committee in terms of that problem, or whether you perceive—how big a problem you perceive that could be.

    Mr. KOMANSKY. Well, I will take a shot at it. I think many of the threats that you have described are real and they exist today. I don't feel that there is any threat in the immediate future or the foreseeable future, where the United States as a capital market center could be disintermediated in its stature by the European markets.

    The main reason for that is not necessarily the strength or weakness of the participants in the financial sector, but because U.S. corporations today represent about 35 percent of total capitalization of corporations around the world.

    As long as that type of relationship remains steady, I think it is clear that the United States, including the players in the U.S. capital markets, will remain a dominant market center. At the same time, I do think it is clear that either London, Frankfurt, Berlin or some combination of those places will develop into a heavily centralized market that will compete with the U.S. capital markets vigorously.
 Page 53       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    If the participants in those two markets are not able to participate on equal grounds, for example, Deutsche Bank being able to acquire Bankers Trust, Merrill Lynch not being able to acquire Bankers Trust, then I think we run the risk of developing much stronger foreign competitors than we have today. But I don't necessarily see it as a threat to the capital markets center being in the United States.

    Mr. PATTERSON. I think I would agree with David's last point. London remains one of the most vibrant financial centers in the world. And, yet, most of its most important participants are owned by foreigners. So I am not sure that simply the issue of foreign ownership should concern us. What should concern us is that we enable our institutions to be as strong as they can be and serve their customers with as full an array of capabilities as possible so that we are stronger vis-a-vis our foreign competitors.

    Mr. ROYCE. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Royce.

    Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman. I appreciate the Chairman having this hearing early in the process so we can try to start working on this problem again. I haven't been here as long as some people, but it does seem like we have all been working on this a long time before I got here and a long time since I have been here and that your comment about wishing the gentleman a long life might be an appropriate one.
 Page 54       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. McCoy, I think I am going to direct all of my questions to you. And I hope—I am not doing it to put you on the hot seat, but just because I need some clarification.

    Mr. MCCOY. I just heard a sigh from the rest of the people.

    Mr. WATT. I know there is a tendency—and I don't want to try to separate you from Mr. Leach's bill, he is the Chairman of the committee, and sometimes there is a tendency to try to tie him to a bill that is going to move, and the Chairman's bill, at least as a starting place, is generally the one that people perceive will move, but a lot of what you had to say seems to suggest to me that there is some aspects of the Chairman's bill that you just as soon be closer to the bill that Mr. LaFalce, the Ranking Member, may have introduced already. Did you already introduce—or maybe in the process of trying to develop——

    Mr. LAFALCE. It will be H.R. 665.

    Mr. WATT. Let me try to zero in on a couple of those things, and without——

    Mr. LAFALCE. Mr. Watt, shortly, I would hope to in principal part become a part of H.R. 10.

    Mr. WATT. ——Without alienating your affinity for the Chairman's bill, let me just zero in on a couple of those issues. Is there any reason in your mind that we ought be fighting to protect just the holding company concept as opposed to the op sub concept that Mr. LaFalce appears to be going to be making an option in this bill?
 Page 55       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. MCCOY. I basically believe that we can be supportive either way.

    Mr. WATT. So the only reason you were so complimentary of the Chairman then was that he has only one option, and you didn't want to alienate him on that point?

    Mr. MCCOY. Well, when I wrote my testimony, that was the only option I had.

    Mr. WATT. OK. But you would like to have both of them, I take it?

    Mr. MCCOY. Well, I think that the issue is the concept of H.R. 10 is a very good bill, and we can be satisfied with that. Now, can you make——

    Mr. WATT. You endeared yourself to the Chairman in your opening comments. I don't want you to take my time to endear yourself to him any more. What I am trying to find out is whether you would like to have both options available to you, and do you think that is really a better approach to this issue?

    Mr. MCCOY. I always like to have options. So if both were available, I would take advantage of both.

    Mr. WATT. All right. The basket issue. It sounds like to me from hearing and reading your testimony that you are closer to Mr. LaFalce on that issue, you would at least like to have some limited movement toward financial services entities being able to be involved in commerce?
 Page 56       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. MCCOY. Yes.

    Mr. WATT. OK. I thought that is where you were. I just wanted to clarify those two points.

    Now, let me turn to the CRA issue, because I want to be clear on what you are saying about that. You basically say that is a subject for another day. We ought to leave that issue alone. But I assume you are not saying that by being silent on CRA in either Mr. LaFalce's bill or Mr. Leach's bill, that we wouldn't be dealing with CRA in some way, just by being silent on it? Were you comfortable with the CRA provisions that were in the bill that left the House Banking Committee last term?

    Mr. MCCOY. Yes.

    Mr. WATT. OK. So I take it your concerns about having a full-blown evaluation of CRA had to do more with what Senator Gramm was talking about than what the bill actually dealt with the last time?

    Mr. MCCOY. Correct.

    Mr. WATT. OK. Thank you, Mr. Chairman. I think my time is up, and I have gotten the clarification on the three main points I wanted.

    Chairman LEACH. Well, I think I should clarify several points to the gentleman. One, on the bill before us, the Chairman has indicated certain flexibility on the use of language, on the use of the verb—or the use of the adjective complementary, which has enormous ramifications. The Chairman is not very sympathetic to the precept of baskets, which in the view of the Chairman, there has never been anyone who has appeared before this committee at any time.
 Page 57       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. WATT. Mr. Chairman, I may not be at odds with you on that. I just was trying to clarify.

    Chairman LEACH. I want to clarify what is the international interest. In terms of the issue op sub, the Chairman has also indicated a great deal of flexibility, and we have experimented with a number of prospective approaches. We have a number held in reserve. I happen to think Mr. McCoy used an excellent bit of terminology before this hearing when he spoke of splitting the baby. And also when several of the members of this panel indicated an extraordinary frustration that the United States Government can't get its act together, that is something we should expect and that this committee will insist upon.

    Mr. WATT. Thank you, Mr. Chairman.

    Chairman LEACH. Mrs. Kelly.

    Mrs. KELLY. Thank you, Mr. Chairman. Before I get into the questions for my first panel I want to take a quick minute to state for the record that I am a strong supporter of H.R. 10 and I will do everything in my power as a Member of Congress and a Member of this committee to see that we pass financial services legislation for the President to sign. I look forward to working with all the Members of the committee to bring our financial services laws out of the 1930's and into the 21st Century. If we don't pass this legislation America's dominance in the financial services markets will be imperiled, I truly believe.

    Mr. Komansky, I recognize the leadership role that Merrill Lynch played some years ago in modernizing the financial services laws, such as the innovative financial products, like the cash management account introduced in the late 1970's and for which Merrill Lynch had to fight in almost every single State at great expense to your company.
 Page 58       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    It is fascinating to me that the securities and banking industry has had to go ahead and drive change, despite the Federal insensitivity to their needs. Your experience is a legacy of outdated financial services laws. And I think we have got to change that by passing a law that creates a symmetry in the marketplace; however, I am not sure I see anything wrong with the current proposal of H.R. 10.

    So I want to ask a question of all four of our panelists. You mentioned in your testimony the mixing of commerce and banking, or some like to say the two-way street. I want to gauge how important that issue really is to all of you. And I am really going to jump off of what Congressman Watt said, I would like to find out if any of you oppose H.R. 10 if it stayed as it now stands without the commercial basket? So I just really want a quick yes or no answer from each of you.

    If it stays as it is, without commercial baskets, would you oppose it?

    Mr. Komansky.

    Mr. KOMANSKY. No, we would not oppose it, provided the flexibility language was still there.

    Mrs. KELLY. Mr. Patterson.

    Mr. PATTERSON. The same.

 Page 59       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mrs. KELLY. Mr. McCoy.

    Mr. MCCOY. I agree.

    Mrs. KELLY. Mr. Huber.

    Mr. HUBER. We strongly support it.

    Mrs. KELLY. So it is an issue but it is not a major issue to any one of you; is that correct? Good. OK.

    Mr. Patterson, Mr. Komansky, you spoke about the outstanding issues in this bill really are a few—that the outstanding issues are few and reasonable. And I am quoting Mr. Komansky, but, Mr. Patterson, you also had language to that effect.

    As you know, Mr. LaFalce is going to be introducing his own approach, which is described as a more narrow approach than H.R. 10. Are you familiar with what he is going to introduce and would you support it?

    Mr. KOMANSKY. I have not studied Mr. LaFalce's bill yet. You can be certain that I will as soon as I get a copy of it. However, I would like to add that when I was talking about the differences being few and narrow, I was talking about the differences that exist within the industries as opposed to what existed before. It does seem to me, as being slightly more than a disinterested observer, that most of the philosophical debate or the chasm that exists is with the Congress and the regulators. And that was the point that I was trying to make.
 Page 60       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mrs. KELLY. Understood.

    Mr. Patterson, would you like to respond to my question?

    Mr. PATTERSON. Well, very briefly. Although I haven't seen Congressman LaFalce's bill, I have heard that it includes a basket. Certainly we can support the bill without it. But the Financial Services Council could also certainly support a bill with it. The other aspect of Congressman LaFalce's bill I have heard referred to is that it does achieve a compromise that is supported by at least one of the combatants on the op sub, and I think a compromise is very important to unblock this whole process. If that does serve to unblock that whole process, we can support that compromise as well.

    Mrs. KELLY. That would be very refreshing. Thank you very much, Mr. Chairman.

    Chairman LEACH. Thank you very much.

    The gentleman from Texas.

    Mr. BENTSEN. Thank you, Mr. Chairman.

    It seems to me that a lot of the—first of all, I appreciate you all being here today, and it is always enlightening and, of course, a lot of the issues that we dealt with last year are the same issues we are dealing with this year.
 Page 61       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. Komansky, and actually for both Mr. Komansky and Mr. Patterson, there has been a lot of discussion with respect to the operating subsidiary issue that it is not a safety and soundness question, in fact Mr. Greenspan answered last year that it was not a question of safety and soundness, that had been an argument at one point and every once in a while it raises its ugly head, and I think that has been put to rest. But it is a question of a subsidy, and an implicit subsidy between a bank and a securities operating subsidiary as opposed to an affiliate.

    Now, as those who are involved in the capital markets, both among the top firms in the capital markets, do you believe that the market truly would agree that there is some subsidy that adds value to a security of an investment banking firm that was an operating subsidiary versus one that was an affiliate of the bank, that is, would the market look to the security or asset value of a Texas commerce bank security that was in op sub differently than it would if it was an affiliate under a banking holding company?

    Mr. KOMANSKY. I haven't thought about it in those particular terms. I would like to have this studied, but intuitively, I would say no.

    Mr. BENTSEN. Intuitively, would you think——

    Mr. KOMANSKY. I think the market would look through that particular issue and evaluate them fairly equally. I don't think it would assign value to the structure.

 Page 62       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. BENTSEN. Mr. Patterson.

    Mr. PATTERSON. I agree with that. I think that if the conditions with which either the affiliate or the subsidiary can deal with the bank are the same, that whatever subsidy there is in the bank itself, and that itself is a debatable issue, will not be transferred any more to a subsidiary than to an affiliate, and that the market would recognize that.

    Mr. BENTSEN. So that the subsidy would be equal between an affiliate and an op sub in your opinion? Another argument has been made with respect to the difference in determining the asset value between an operating subsidiary and an affiliate. In fact, under the legal structure of an operating subsidiary, say an investment bank, a subsidiary would be treated as an asset of the bank more so than through an affiliate structure of the holding company.

    Mr. PATTERSON. Yes.

    Mr. BENTSEN.And in the event that there was a—that the bank had financial problems that asset could be liquidated to the benefit of the bank. Do you agree with that, or do you think that the asset value is the same?

    This is an argument that Treasury puts forth that in fact the bank has a closer hold of the asset, and thus it improves the balance sheet of the bank.

    Mr. PATTERSON. Well, I think that the asset value would be the same whether it was an affiliate or a subsidiary. The obvious difference is that if it is a subsidiary, the asset is included in the consolidated balance sheet of the bank. And if it is a valuable asset, obviously it improves the value of the bank, yes.
 Page 63       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. BENTSEN. And finally, and for Mr. McCoy, and I appreciate your endorsement of the operating subsidiary although I understand your reason for saying, you know, any bill is better than no bill. I don't know that that is exactly what you said, I'm sure there are certain bills you wouldn't agree with. But some had suggested and in the Senate or in the other body last year, there was a compromise plan that allowed for an operating subsidiary of an asset for banks with assets up to a billion dollars.

    I mean, is there any worth in doing that? I mean, obviously your bank couldn't utilize it. And how many national banks with assets of a billion or less do you truly believe would utilize this versus the other direction?

    Mr. MCCOY. I am of the belief that—I don't know how you depict it as a billion or $799 million. I think what is good for the goose is good for the gander and should not have levels like that.

    Mr. BENTSEN. Thank you. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you.

    Mr. Hill.

    Mr. HILL. Thank you, Mr. Chairman. And I just want to congratulate this panel on excellent testimony. And what I do hear I think is that as we move closer to the possibility of a bill, positions in the past which were strident to have been softened some by all of you and that perhaps maybe we are getting close to actually being able to do something.
 Page 64       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    One of the concerns I have, I have some concerns about this operating subsidiary issue with regard to risk taking subsidiaries, because that creates an environment where liability can migrate and also profits migrate. And my concern is specifically really with regard to the insurance industry.

    The solvency of the insurance industry is substantially regulated at the State level, and in many instances the State regulators use the assets of parents and affiliates to determine the level of risk they are willing to allow the insurance companies to take.

    Do you believe, and I would ask each of you to respond to that, do you believe that there is risk to undermining the solvency of the insurance industry if insurance underwriting activities are allowed to occur in operating subsidiaries?

    Mr. HUBER. Well, I guess I am surprised I am the first one. I think the risk is certainly containable, manageable, under the present structure of State regulation. There is always risk. But I think that it would be no greater than it is today. The structure of the State solvency regulations work pretty well, and they would presumably still apply.

    Mr. HILL. You guarantee the solvency of some of your subsidiaries to insurance regulators?

    Mr. HUBER. Correct.

 Page 65       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. HILL. If you are a bank and prohibited from doing that by the comptroller, would that impact your—the attitude of insurance regulators with regard to solvency issues?

    Mr. HUBER. Typically when we guarantee the capitalization of a subsidiary, it is for capital efficiency. I always have the option of putting the money there. But in many cases, it is more capital efficient to be able to give a guarantee to the State regulator of the State of Maine or the State regulator of the State of Pennsylvania. But the option of fully capitalizing is always there. So I don't think it is a major issue.

    Mr. HILL. Mr. Huber, I found your testimony with regard to Mexico really interesting. Can you offer same or similar services to customers in other countries at relatively lower costs than you can to the United States by virtue of more flexible powers with regard to affiliation?

    Mr. HUBER. Most certainly. As I say, it is a very efficient distribution system, and I would love to be able to offer the same products to Mr. McCoy, a bank. I mean he has a wonderful branch network and it would be a way to access what in most of our overseas operations are totally untapped markets. It lies under the radar screen of the traditional agency force.

    Mr. HILL. Generally people use examples such as Japan, Germany, Switzerland, you used the example of Mexico, as examples where more flexible affiliation has created a more vital market. Are consumers in those nations able to buy insurance services at lower costs as a consequence of that?
 Page 66       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. HUBER. Well, as I say, I think that they are able to buy, particularly the plain vanilla or basic cable type of products. Typically when they want a more sophisticated product, they do need the hand holding or the advice of a qualified agent or adviser. And so we see it really as a continuum, but certainly at the lower level, and this to me is really quite exciting. We are tapping a market that is underserved today or unserved, and I think it would be the same in this country.

    Mr. HILL. In your earlier comments, you made the reference to the fact that you are not particularly a fan of State regulation of insurance. I certainly believe H.R. 10 does lay the foundation for ending the State regulation of insurance, which I have some concern about. I guess I would ask you, do you have any concern that the current structure of H.R. 10 actually is going to create more regulators of insurance rather than fewer, because obviously the Fed would have a role and if operating subsidiaries become a reality, then the Comptroller would have a role, and then the insurance regulators would have a role? Does that concern you some?

    Mr. HUBER. I didn't want to leave the impression that I am against State regulation; it works quite well now, and we live comfortably within it. We would hope that whatever happens that one would preempt the other. I really would pray not to have another whole new layer of regulators. We have more regulators than Carter has little liver pills already. And so another layer would be counterproductive. That is the only request.

    Mr. HILL. Let me just ask one last question, with regard—there is a Senate bill that does not include a definition of insurance. Do you think that that is a good idea or a bad idea?
 Page 67       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. HUBER. I have to opt out. I am not familiar with that bill.

    Mr. HILL. Thank you, Mr. Chairman. Thank you, Mr. Huber. I thank the panel.

    Chairman LEACH. Mr. Sherman.

    Mr. SHERMAN. Thank you, Mr. Chairman. I would like to announce I am the weak supporter of H.R. 10. I hope we are able to improve the bill, so that it is something that we can all vote for. Glass-Steagall was a reaction to the problems of the 1930's. And I think that this bill still remembers the lessons of the 1930's. I wasn't around for those. But as a Californian, I was around for the lessons of the 1980's and Mr. Charles Keating, and I would like to focus on the consumer protection aspects.

    What happened with Charles Keating is that people walked into financial institutions that for half a century they had been told were guaranteed by the Federal Government and were moved from the new accounts desk to the investment desk and invited to buy the subordinated debentures of the financial institution itself. And that raises two lessons. The first is the separation between the new accounts desk and the financial securities desk or the insurance desk, but the other is also selling your own securities.

    I would like to address this to Mr. McCoy. Do you see it as a desirable provision of financial reform that a bank is prohibited from selling its own equity or debt securities other than either regulated insurance products from one of its affiliates or, of course, of its own certificates of deposit?
 Page 68       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. MCCOY. I would think that generally it was prohibited. It would not be a bother to me—I understand where the issue is coming from. If I could comment, one of the interesting things to me is we always talk about the old brick and mortar, today the consumer can go on the Internet and have really no idea who he is dealing with, can buy securities, can open a checking account that really isn't a checking account, it is coming from Fidelity, somebody else.

    So I think that, you know, that the issues are bigger than whether the account desk is here or there, and I think there is a whole new issue out there.

    Mr. SHERMAN. I understand, although, when I think of the people that we are trying to protect, an awful lot of people, baby boomer and younger, are aware of all of the different investments that are out there. But a huge portion of the wealth, particularly the wealth invested in long-term certificates of deposit is held by people 80-years-old or older, many of whom who are not on the Internet and who had have 80 years of experience—well, 50 years of experience with our current financial situation and by conditioning believe that when you walk into a depository institution, that everything you buy there is federally insured.

    And I agree with you that we may not be able to create separate offices with brick and mortar. The last time I was in a depository institution, the same new accounts person walked me from one desk to the other desk, it was all of 10 feet, and offered me a variety of uninsured products. I thought they were suitable and that was fine. But I do think that we have got to go for the strongest possible written statement signed by the consumer saying a full understanding that these securities could go up and down, and they are not insured by any agency of the Federal Government.
 Page 69       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    I am troubled by language that says not insured by FDIC as if—that almost implies, yes, it is insured by some other Federal agency. And I think a very bold, very short, huge nobody-would-have-to-put-on-their-glasses-to-read statement may be criticized by the industry as being prerogative. But I think we need words like ''not insured by anyone,'' ''could decline in value'' in very large letters.

    Thank you.

    Chairman LEACH. Well, thank you, Mr. Sherman.

    Mr. Inslee.

    Mr. INSLEE. I will pass, Mr. Chair.

    Chairman LEACH. Mrs. Jones.

    Mrs. JONES. Mr. Chairman. If I use the microphone, it would help. Thank you, Mr. Chairman, to the presenters. I was here for a little while, had to leave out, I guess that is what all Congresspeople do. This is my first time in Congress. The name is Stephanie Tubbs Jones. I am from Cleveland, Ohio. I am the successor to Lewis Stokes.

    I have a couple of questions only because even though the issue or this discussion is very old to all the Members of Congress, it is very new to me, a new Member of Congress, and so I ask you to bear with me as I ask a few questions.
 Page 70       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    To Mr. McCoy, I want to turn you to page 4 of your testimony with regard to the consumer privacy, and ask you when you say that having the comprehensive consumer privacy provisions would impact consumers banks, the entire national and international economy, can you give me some examples of what you mean by that statement?

    Mr. MCCOY. Let me just look at it here.

    Mrs. JONES. Sure.

    Mr. MCCOY. Basically, what I am concerned about is there are a number of things regarding privacy where I think that because we have information about the customer, we can provide him with even better services as opposed to fewer services. And so if we put in strict controls in certain areas, I think we are going to hurt the consumer, hurt his capability to get the right product at the right time. So that is an example of that.

    Mrs. JONES. And then that will affect the economy?

    Mr. MCCOY. If we introduce inefficiencies into the economy, it will affect the economy. If we do not give the best product to the customer, if we are not as competitive, it will have an effect on the economy.

    Mrs. JONES. I want to follow up with my colleagues' question with regard to consumer notification. The other thing that I would raise with regard to people going on the Internet. There are a lot of people out here with very little money who don't have an Internet, who don't know how to access that information, and I represent a number of them from the 11th Congressional District. So I have to speak up and speak out on behalf of them with regard to issues of notification. And much like my colleague, there are a lot of people who don't understand the distinction.
 Page 71       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    We operate—or you operate—the banking industry with—they don't even understand what the word subsidiary means. And so those of us who are in a position to safeguard their interests have to speak up about notification.

    I did have one more question for you. It is not that I am picking on you, you just provided the best testimony for me to ask questions. Let me see, where was my additional question? Give me one second. Oh, I know. And I know that my colleague, while I was out of the room, Mr. Watt, raised the issue about the CRA. It is important for me as a Representative of the City of Cleveland, recognizing that you say you have had a good history with CRA, BANK ONE has had a good history with CRA, that as we change the face or we modernize banking that CRA is always a part of the modernization, because it is as a result of the people who have been the mainstay in our Cleveland communities that you are able to even think about the modernization to the extent that they have held down the cities on all of our behalfs.

    So I would encourage you and all of you involved in this process to not allow CRA to go to the side. It is the community that allows you the opportunity to operate, and I just want to be heard on the record with regard to that.

    Mr. Chairman, thank you very much.

    Chairman LEACH. Thank you for that thoughtful observation. If I could, John, if I can go to Mr. Ryan and then to you.

    Mr. Ryan.
 Page 72       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. RYAN. Thank you very much. I would like to direct my question to Mr. Huber and maybe Mr. McCoy as well. I was intrigued with your testimony on what you have done in Mexico and for other countries with financial modernization. I would like to talk about what life will look like afterwards.

    You were able to bring tools of wealth creation to lower and lower middle class Mexicans and other people of other countries. Where I live, in southern Wisconsin, we have—I have quite a constituency of lower and lower middle class Americans. And I can't help but seeing Mr. McCoy there thinking of Gary Rilly, the local BANK ONE president of the branch in Janesville, Wisconsin, well respected member of the community, participates in the YMCA. It is an area where people know they can go and access products, but there are a lot of lower and middle class Americans who don't believe they have access to these tools of wealth creation.

    I would like for you to address the point on how you think the barriers for offering these tools of wealth creation to individuals in America would be relieved, and what would your company structure would look like after financial modernization?

    Mr. HUBER. Well, as I mentioned before in talking to Mr. Hill, we would see that using the branch network of a retail oriented bank would be a very efficient channel of distribution, one which we have used in other marketplaces. And we typically find in emerging markets, and many of our communities would be defined as emerging markets, the first financial services product that an individual buys when he or she breaks into that lowest level of the lowest part of the middle class, is life insurance.

 Page 73       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    And, typically, they are relatively small policies, sometimes they are the equivalent of $2 a week or something like that. And they don't—they are really not serviced today. To the agent, it is just not attractive business. So the ability to be able to have it available and service that population through a branch network to me is a very appealing opportunity.

    And I guess I should add one other thing about Mrs. Jones' comments on disclosure. I mean we have the most confiscatory financial instrument known to man out there called lottery tickets. And if you want to have financial disclosure, why don't we put on lottery tickets that ''you have one chance in a million.''

    Mrs. JONES. If you would allow me, Mr. Chairman, everybody knows their chance on winning a lottery ticket, and sometimes it is better than in other institutions, but I will laugh with you on it.

    Mr. HUBER. I am not sure. Sorry, Mr. Ryan.

    Mr. RYAN. Thank you. Thank you, Mr. Chairman.

    Chairman LEACH. Well, thank you, Paul.

    Mr. LaFalce.

    Mr. LAFALCE. I thank you, Mr. Chairman. I think the panel will be finished as soon as we recess for this vote, and then I have a press conference. Let me just make a couple of brief points, Mr. Huber. First, I am talking about 20 years ago, and when I introduced in the late 1970's a uniform product liability bill that was strongly opposed at that time by the United States Chamber of Commerce and the dissenting opinion to my report was written, amongst others, by Dan Quayle, a Member of my committee at the time, which shows how positions can evolve over the years.
 Page 74       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    At the same time I introduced that product liability bill, I introduced the Federal Insurance Commission, which could not have duplicate regulation, but had the capacity when there was deficient State regulation and appropriate State regulation to preempt the field, and I have suffered for the introduction of that bill from that time to the present.

    Let me say something else too. I will be introducing a bill shortly at a press conference, H.R. 665. It is my hope and desire and intention that there never be a vote on that bill on the floor or in committee. It is my hope that whatever areas of disagreement, small as they are, that exist between Chairman Leach and myself at present, it can be compromised away before we get to a committee mark, so we can have some improved and enhanced and consensus brought by a partisan consensus version of H.R. 10.

    The Chairman said something today that he has a fallback position with respect to operating subsidiaries. I heard that loud and clear, and I assure him that on any issue where there is a difference of opinion, I too have a fallback position certainly with respect to the whole position of banking and commerce, and I look forward to working together.

    One thing I was thinking of as we were sitting here, gee, what if a bill didn't address the question of operating subsidiary at all and didn't address the question of a basket at all, but didn't make any changes in existing authorities, you know, for any present charter or any present regulator either, but made all the other changes that are being talked about? That might not be a bad bill.

    I thank you.
 Page 75       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Chairman LEACH. Well, thank you. I want to thank the panel. I think we have gotten off to a strong start, and I just want to emphasize that even though some differences were expressed today, that the overwhelming outcome is one of consensus, rather than dissent. And sometimes as you discuss differences one gets the emphasis on difference, but I think I am correct in sensing a great consensus.

    We have a vote on the floor. I am told we might have one to shortly follow it. So for the sake of the next panel, I would like to leave a precise time so people can arrange for lunch, and so we will recess until 1:30. I want to thank all of you.

    Mr. HUBER. Thank you.


    Chairman LEACH. The hearing will come to order.

    I had hoped for a few more Members of the Minority to be here, but they are at a press conference and will be here shortly. At least one member of your panel has a commitment, and I thought we would begin based on that circumstance.

    Our first witness will be Roy J. Zuckerberg, who is a Limited Partner of Goldman, Sachs and Chairman of the Securities Industry Association.

    Our second witness is Mr. R. Scott Jones, who is Chairman and CEO of the Goodhue County National Bank of Red Wing, Minnesota. Mr. Vento has welcomed you earlier in your absence. I would like to say, as a resident of greater northern Iowa, we welcome you, too.
 Page 76       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Our third witness is Mr. William J. McQuillan, who is Chairman, President and CEO of the City National Bank of Greeley, Nebraska, and President of the Independent Bankers Association and a resident of greater western Iowa. We appreciate that as well.

    Our fourth witness is E. Lee Beard, who is President and CEO of the First Federal Bank of Hazleton, Pennsylvania, and Chair of America's Community Bankers. Our next witness will be Matthew P. Fink, who is President of the Investment Company Institute; and our last witness for this panel will be Michael P. Smith, who is President of the New York Bankers Association.

    Chairman LEACH. Mr. Zuckerberg has a commitment, and we appreciate his staying with us. We will begin with you, sir.


    Mr. ZUCKERBERG. Thank you.

    Mr. Chairman and Members of the committee, I am Roy Zuckerberg, Chairman of the Securities Industry Association and a limited partner of Goldman, Sachs. I appreciate the opportunity to present SIA's views on H.R. 10, the Financial Services Act of 1999.

    SIA commends you for your steadfast determination to enact this much-needed legislation to modernize the regulation of the U.S. financial services industries. We applaud your continuing leadership in reintroducing H.R. 10 so soon in the legislative session.
 Page 77       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. Chairman, my message today is a simple one. The securities industry strongly supports financial services modernization legislation and urges this committee, the House and the Senate to pass it promptly.

    When the House passed a similar version of H.R. 10 last year, it faced and resolved many of the contentious issues that have stopped financial services modernization legislation. The bill's many compromise provisions developed over years of negotiation amongst securities, banking and insurance trade groups gave it broad industry support.

    SIA supports key provisions of H.R. 10 because they go a long way toward meeting three principles upon which any financial modernization legislation should be built: one, functional regulation; two, a two-way street; and, three, competition without Federal subsidies.

    H.R. 10 creates a new regulatory structure that would enhance the competitiveness of financial services firms by permitting securities firms, insurance companies and banks to freely affiliate in a holding company structure. Increased competition between financial services firms will reduce costs, give customers more choices and help the U.S. financial services industry maintain its preeminent status in the global economy, something we should be very proud of.

    Today financial institutions are affiliating with one another at a dizzying speed under a regulatory system that was intended to ban such affiliations. In the last two years alone, banks have acquired at least 50 securities firms. Mergers and acquisitions are occurring in spite of significant and anti-competitive regulatory obstacles. For example, currently banks can acquire security firms, while security firms generally cannot acquire commercial banks.
 Page 78       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    The financial services industry will continue to evolve in response to customer demands and to remain competitive. It is simply not desirable or possible to maintain the status quo. The fundamental policy question for Congress is not whether these affiliations should occur but what regulatory system should govern the combined entities. Surely, it should not be the current patchwork regulatory scheme that gives some financial institutions unfair and irrational competitive advantage over others. SIA believes these combined entities should be regulated under a system similar to that proposed in H.R. 10.

    The U.S. securities industry is perhaps as competitive as any industry in the world. That competition, including the ability to affiliate with entities other than banks, is one reason why the U.S. capital markets are the world's largest and most liquid. In the securities markets, one need only look at the vast choices in products, services, providers and methods of compensation to see how competition has greatly benefited investors.

    H.R. 10 would expand those choices. Individuals and corporate customers worldwide could have all their financial needs met by a single firm if securities firms, insurance companies and banks were allowed to affiliate. SIA's first principle, functional regulation, would require one regulatory agency to apply the same set of rules to the same activity engaged in by any financial institution regardless of the type of institution it may be.

    Under H.R. 10, all securities activities would be performed outside of a bank except for a small number of carefully defined securities activities that traditionally have been conducted in banks with the benefit of SEC, SRO and State securities regulation.

 Page 79       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Second, the legislation generally provides for a two-way street by permitting securities firms, insurance companies and banks to freely affiliate with one another on the same terms and conditions and to engage in any activity that is financial in nature.

    Third, H.R. 10 provides that all securities and insurance activities must be conducted in separately capitalized affiliates of a bank rather than in the bank itself. As a result, these activities would not pose a risk to the deposit insurance system and taxpayers would not be forced to indirectly subsidize banks that engage in those activities.

    SIA also supports other key provisions in H.R. 10. For example, H.R. 10 would create wholesale financial institutions which are banks that do not accept federally insured deposits, that is, they generally do not accept deposits under $100,000. WFIs would provide commercial banking service to institutional customers without imposing any risk to the bank insurance fund or U.S. taxpayers.

    Mr. Chairman, last session SIA supported H.R. 10 and worked actively to pass it. That bill represented a series of compromises by every sector of the financial services industry. We supported the bill because we were and are committed to maintaining the delicate consensus compromise that emerged from all the participants.

    However, as in years past, there are several areas of the bill that SIA continues to believe could be improved. Most importantly, this would include providing securities firms with greater flexibility to affiliate with banks even if they have nonfinancial activities. My written statement contains a more complete discussion. The changes, we believe, would make H.R. 10 more valuable to investors, consumers and the industry.
 Page 80       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    SIA worked with you, Mr. Chairman, with Members of the committee, others in Congress and many in the financial services community to reach a number of the compromises that were reflected in H.R. 10. The progress you made cannot be overstated. Passage of financial services modernization legislation has long been SIA's number one legislative goal. As of today, no other legislation has been introduced that meets our principles to the extent H.R. 10 does.

    We look forward to working with you, Members of your committee as well as the House, Senate and Administration to enact financial services reform legislation this year. The most important priority for us is getting the legislation enacted.

    Thank you very much.

    Chairman LEACH. Thank you, Mr. Zuckerberg.

    Mr. Jones.


    Mr. JONES. Mr. Chairman, thank you for introducing H.R. 10 and holding these hearings so early on in this session.

    As we all know, the road to financial reform has been long and difficult. Real progress has been made, however, thanks to your leadership and the efforts of many on this committee. The fast start in this committee and in the Senate certainly boosts the chances for success. H.R. 10 reflects the growing consensus that emerged last year, and we believe it is the right place to begin the debate this year.
 Page 81       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    As a banker, I need to offer new products and services to meet the changing needs of my customers. Let me give you a personal example from my town of Red Wing, Minnesota, population of 16,000 people.

    Back in the 1980's a popular product was single-premium, fixed-rate annuities. We couldn't offer that product as a national bank. Because we couldn't offer this key product, we lost business. More important than that, we lost relationships with some of our key customers. It affected our growth and, therefore, our ability to serve the local economy.

    Because we were worried about serving our community, we petitioned the OCC for permission to sell annuities, and we got that permission some two years after the petition was sent in. Now, nine years later, our ability to offer annuities has helped us build our customer base and, therefore, be able to serve our community.

    Now I face the same dilemma I faced eleven years ago today. Because we can't offer customers the products they want, many are taking their business to other providers; and in today's fast-paced world, we can't wait for two years for approval to offer these products. Our customers need them today, and we need to act now. We simply must move forward on financial reform. With each passing day, the market gets further ahead of the regulatory structure.

    Also, this may be the last chance to deal with the commercial ownership of banks through unitary thrift holding companies. H.R. 10 represents a compromise on unitary thrifts but one acceptable to the ABA, and it is important to note that America's community bankers supported a bill last year that contained this provision.
 Page 82       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    For many banks and particularly community banks, the unitary thrift issue is critical. The crux of the unitary thrift issue is whether to mix banking and commerce. If Congress does not make a decision soon, the marketplace will make it for us, and we will have permanently crossed the bridge into full banking and commerce.

    For example, Microsoft could buy a small thrift with their spare change, merge it with a large bank and run the combined firm as a unitary thrift. While technically having a thrift charter for all practical purposes, it would, of course, be a bank.

    And that is the critical point. There is very little, if any, difference between a bank and a thrift. However, there is a big difference in how their holding companies are regulated. For example, no capital standards are imposed on parent holding companies of thrifts. By not dealing with the unitary thrift issue, Congress will have blessed two parallel banking systems, one with a much stricter regulatory standard than the other, and we know that basic economics tells us the flow of capital will move to the lesser regulated entity.

    In fact, interest in thrift charters by nondepository firms is growing rapidly. Large companies like ADM, Nordstrom and General Motors are among 70 nondepository firms who have recently sought a thrift charter.

    Let me touch on a few other important provisions in H.R. 10.

    First, we are very supportive of the securities provisions in this bill. As you know, a lot of people, including Members of this committee and the ABA Securities Association, have worked long and hard to develop a consensus.
 Page 83       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Second, the treatment of insurance has been one of the most troublesome issues in financial services reform over the years. The current version of H.R. 10 strikes a balance, we believe, and is based on negotiations last year between the ABA in partnership with the New York Bankers Association and others. Never before had the Independent Insurance Agents of America and the banking industry been able to reach a compromise. But we did last year, and that is significant.

    Lastly, we are pleased that H.R. 10 contains several positive Home Loan Bank provisions. As you well know, Mr. Chairman, in rural communities it is becoming increasingly difficult to attract resources for servicing the capital and loan needs of small rural communities. These provisions will help in this regard, enabling banks to do a better job of serving their communities.

    Thanks to the work of this committee, we are on the verge of enacting thoughtful financial modernization reform; and we look forward to working actively with you to see its passage.

    Thank you.

    Chairman LEACH. Thank you, Mr. Jones.

    Before turning to Mr. McQuillan, I have to inform you that there is another vote on the floor; and so the hearing will be in recess subject to the vote.

 Page 84       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Chairman LEACH. The hearing will reconvene.

    Our next witness is Mr. William McQuillan. Please proceed.


    Mr. MCQUILLAN. Thank you, Mr. Chairman and Members of the committee.

    I am Bill McQuillan, President of the Independent Bankers Association of America and President and CEO of the City National Bank in Greeley, Nebraska. Thank you for inviting the IBAA to testify today on H.R. 10.

    Before getting into the specifics of H.R. 10, I would like to underscore the fact that this bill will clearly authorize the common ownership of the largest banks, security firms and insurance underwriters in the United States. This enormous public policy shift has been largely overshadowed by other controversial sections of the bill.

    The merger and acquisition wave which this bill would accelerate is already having an anti-competitive effect on ATM networks and credit and debit card markets. Citicorp announced that it will no longer promote the Visa and MasterCard brands. This decision hurts thousands of community banks, thrifts and credit unions trying to enter the credit and debit card markets and offer competitively priced electronic products at a fair price to their customers. Will other big card issuers follow? We believe, unfortunately, they will.
 Page 85       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Let me now turn to the specifics of your bill, Mr. Chairman. I want to commend you for building on the progress that we made last year by introducing a bill substantially similar to the one that almost passed the Senate.

    The IBAA policy body has developed seven standards by which financial modernization bills will be judged. First, the IBAA will oppose any legislation that permits or encourages the common ownership of commercial banks and commercial firms. Last year, before the Asian crisis, this committee supported such a proposal. In their most recent testimony before the Senate Banking Committee, Chairman Greenspan and Secretary Rubin did not.

    Proponents of such common ownership try to sugarcoat this bitter pill by putting in revenue and/or size limitations. One proposal would limit such ownership to commercial firms whose revenues provided less than 15 percent of the total revenues of the resulting conglomerate. If there were no such limitations, this 15 percent basket would permit Bank of America to buy Apple Computer or WorldCom.

    With the size limitation, the door would still be open for the largest commercial banks to buy many small businesses. These are paths we should not go down, Mr. Chairman. They are anticompetitive or distort the impartial allocation of credit and would threaten the safety and soundness of our banking system and lead to crony capitalism.

    We commend you, Mr. Chairman, not only for keeping banking and commerce out of the bill you introduced but also for your very strong statement of January 20th regarding a bright line in the sand on this issue.
 Page 86       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Second, the IBAA cannot support and will oppose any legislation that has not closed the unitary thrift holding company loophole. This loophole allows any commercial firm to get into the banking business by buying a unitary thrift. Closing the necessary thrift loophole has been a bright line test for banking industry support of banking legislation. Chairman Greenspan has recommended that a moratorium be placed on such applications.

    May we remind the committee in 1996 the banking industry put billions on the table to capitalize the save and help pay for FICO. Please do not allow the unitary thrift loophole to again create a parallel banking system supervised by the OTS. We support the language in your bill, Mr. Chairman, that closes this loophole prospectively and further prohibits grandfathered thrifts from being sold to a nonfinancial firm.

    Third, we also believe that any financial modernization bill must include provisions for meeting the funding and liquidity needs of community financial institutions. The Federal Home Loan Bank reform language in your bill, Mr. Chairman, meets this test.

    Fourth, any financial modernization bill should include new retail powers for national banks. These should include, within the parameters of safety and soundness, insurance agency powers and the power to sell mutual funds and annuities.

    We would view any rollback of an existing authority as anti-competitive. Regrettably, our most recent analysis of the insurance language in H.R. 10 suggests that the banking insurance powers would indeed be rolled back, making it more difficult for community banks to enter the insurance business in the future.
 Page 87       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Additionally, H.R. 10 would remove the judicial deference of the OCC with respect to insurance sales authority under the National Bank Act.

    Fifth, of paramount concern to the IBAA is a protection of the deposit insurance fund, which is the lifeblood of our community banks. This fund must be protected from being raided should a huge financial conglomerate collapse. For that reason, there should be a maximum insulation of risky activities conducted in a financial conglomerate from the commercial bank component.

    We support the provision in your bill that prohibits bank subs from engaging in certain activities not permissible for national banks to engage in directly, such as insurance or securities underwriting, real estate investment or merchant banking. Let me add a few IBAA members would be clamoring to enter those markets. Or if the fund is rated to bail out a conglomerate, our members will be asked to help to pay replenish the fund. And we do not think that is either fair or good public policy.

    Sixth, we strongly support the provision in your bill, Mr. Chairman, that designates the Federal Reserve as the umbrella regulator for diversified financial services firms.

    Seventh and finally, Mr. Chairman, we support each and every consumer regulation that does not discriminate against banks.

    In addition to these seven guiding principles, IBAA is concerned about the creation of WFIs. WFIs would have access to the Federal Reserve System's payment services, breaching the secure walls of the payment system that is so vital to community banks. WFIs also could be exempt from banking regulations, having the effect of creating a new and superior banking charter. These are major policy shifts that we believe should be further explored.
 Page 88       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    In conclusion, Mr. Chairman, we would recognize the enormous commitment of you and others that nearly resulted in the financial modernization bill being enacted in the last Congress. We appreciate your building on that progress. We look forward to working with you, Mr. Chairman, and others on this committee to find a product that meets the principles outlined in our testimony and warrant our support.

    Finally, I would like to, if the Chairman would allow me, enter into the record a letter that we sent to the Senate side last year basically outlining our opposition to the unitary thrift and the issues that were are going on over there. We felt that ABA and IBAA could not support that issue. We sent a letter to Chairman D'Amato last year and also to Senator Sarbanes. I would like to enter that as part of the record to show our support in opposing the unitary thrift. Thank you.

    Chairman LEACH. Without objection, that letter will be presented in the record; and, without objection, the lengthier testimony of all witnesses will be put in the record as well.

    Chair Beard.


    Ms. BEARD. Good afternoon, Mr. Chairman. My name is Lee Beard. I serve as President and Chief Executive Officer for First Federal Bank in Hazleton, Pennsylvania. I am also fortunate enough to serve as the chair for America's Community Bankers, and that is the capacity in which I speak to you today. First Federal is a $520 million asset institution which is held by a unitary savings and loan holding company. I am the unitary thrift.
 Page 89       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    ACB appreciates this opportunity to testify on financial modernization legislation and specifically on H.R. 10. We share your hope stated in your letter of invitation that the 106th Congress will agree, and I quote, on legislation to provide a framework where the banking, securities and insurance industries compete at an optimal level of efficiency and effectiveness while providing consumers, and that is an important point, access to the broadest range of financial services and products.

    In our opinion, the best way to reach that goal is to preserve the best elements of the current financial system and then expand opportunities to others that have been held back for years by Depression-era laws. And today we think that there is no better model for financial modernization than the business flexibility found in the thrift charter and holding company.

    Financial modernization should provide the flexibility for institutions to adapt to the rapidly changing marketplace and to structure the delivery of financial services to their customers in the best possible way. This principle of freedom to choose is very important. I think it is important that I give credit where credit is due. While those are certainly the comments of the ACB, they are actually reflected in page 9 of the testimony of the ABA.

    One example that might be important to you is my own institution, First Federal Bank. We decided to organize a unitary thrift holding company after carefully evaluating the needs of our local market and customers, deciding that a new direction would be the best way to grow and to serve our community. The flexibility of the charter and its unitary structure allowed us to purchase a title insurance agency subsidiary known as Abstractors, Inc.
 Page 90       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    This company provides title searches and real estate settlement services in Northeast Pennsylvania. Abstractors provide services not only to First Federal Bank customers but to customers of other banks and financial companies. We are also seeking a license to offer trust services through another holding company subsidiary.

    At the same time, there are appropriate tradeoffs for this flexible holding company arrangement. We are required to maintain our commitment to homeownership and to consumer lending. Our commercial lending authority is actually restricted, and we undergo the strict regulation of both the OTS and the FDIC. Still we make this choice not because of Government dictates but because our local market says it is the right thing to do.

    Business flexibility works in Northeast Pennsylvania and throughout the United States. Modernization legislation should expand this flexibility throughout the financial industry.

    Our customers do not care if we are a bank or a thrift. They do not come and ask what our charter is. They talk to us about what products we offer, what risks they take, how we provide the service and how we price our products.

    While H.R. 10 does make some major improvements, such as permitting banks to freely affiliate with securities and insurance firms at the holding company level, it also does substantial harm to national banks, thrifts and the 875 existing unitary thrift holding companies, which includes First Federal Bank.

 Page 91       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    H.R. 10 would take away many of the unitary thrift holding company affiliation rights for companies that had not applied for a charter by October 7th, 1998. While some firms might be satisfied with the improvements in the bank holding company structure provided in H.R. 10, others might not, and some might not even qualify for a bank charter. There is no reason to pick an arbitrary date on which to cut things off.

    Second, H.R. 10 would prohibit existing thrift holding companies with nonfinancial affiliates for merging with other firms, with the small exception of mergers among the limited number of grandfathered thrift holding companies with nonfinancial affiliates. All other firms would be barred by law from acquiring a grandfathered thrift holding company.

    These artificial constraints on mergers, acquisitions and divestitures would only serve to decrease the franchise value of existing holding companies and reduce economic efficiency without any corresponding public policy justification.

    Those who claim these limits are based on concerns about mixing banking and commerce are actually wrong, in our opinion, because the commercial lending of thrifts is strictly limited. They may not lend to commercial affiliates under any circumstances. Thrift holding companies do not mix banking and commerce.

    Remember that much of our institution's economic value is based on what our charter allows us to do today. H.R. 10 would undermine the uniform Federal standards under which our institutions can offer lending and deposit-taking services. H.R. 10 imposes an additional burdensome notice and comment process whenever the OTS seeks to implement such standards.
 Page 92       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    For these reasons, and for many others, ACB urges the committee to rethink its approach to financial modernization and to write a bill that will provide new competitive options for financial firms without reducing or eliminating the ability of firms to provide competitive products and services.

    I thank you, Mr. Chairman for the opportunity to testify; and I would be happy to answer any questions.

    Chairman LEACH. Thank you, Ms. Beard.

    Mr. Fink.


    Mr. FINK. Thank you, Mr. Chairman. I am Matthew Fink, President of the Investment Company Institute, which is the national association of the mutual fund industry. I am pleased to be here today to testify in support of your bill H.R. 10. I would like to commend the committee in general and you, in particular, Mr. Chairman, for your efforts in leading the effort of financial modernization.

    Last year this committee, working with the House Commerce Committee, reached historic compromises on issues that have been divisive for decades. I think that unprecedented action last session spoke very powerfully. It is now clear to all of us that the laws that have historically separated banks, securities firms, mutual fund companies, and insurance companies are now obsolete, and we think H.R. 10 represents a very sound framework for addressing financial services reform.
 Page 93       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    First, and most obviously, it permits affiliations among all types of financial services companies. Second, in the mutual fund area, it would grant commercial banks full mutual fund powers. Third, in the mutual fund area, it would modernize the Federal securities laws to deal with bank mutual fund activities. Fourth, it would generally, and I want to emphasize the word generally, implement the oversight system based on a sound system of functional regulation. So those are the four reasons we support the bill.

    In that spirit of support, I would like to mention three issues that we would hope the committee could address as you move along. The first is an issue that only became apparent in the closing days of the last Congress. And I am happy to report it is an issue that no one else has mentioned today, so maybe it will add a little more spark or life than some of the other issues. The issue is to ensure that functional regulation, which everyone agrees with, is applied to all, not just some, of the bank regulatory agencies.

    More specifically, if you look at H.R. 10, it has the proper standards for governing the powers of the Federal Reserve Board and the FDIC as functional regulators. But the same has not been done with respect to the Comptroller of the Currency and the Office of Thrift Supervision.

    Let me start by asking: ''Why is functional regulation so important?'' Mr. Huber on the early panel this morning discussed functional regulation, and he gave one very important reason; you don't want multiple regulators going after the same firm for the same activities. It is duplicative. It is piling on. It is confusing. But there is a second, at least as important reason, and, that is, you don't want regulation that is designed for one type of financial institution inappropriately placed on another type of financial institution.
 Page 94       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Now, let me illustrate. Our securities markets and mutual fund markets are based on transparency, strict market discipline, creativity, entrepreneurial activity and risk taking. The SEC has repeatedly testified before this committee and other committees of the Congress that imposing banking regulation—which is premised on safety and soundness—would be a very serious mistake.

    If you impose safety and soundness standards on entrepreneurial firms like mutual fund companies and securities firms, you could threaten the continued operation of the existing securities regulatory system and, as Chairman Levitt testified, even the health of our Nation's capital markets.

    H.R. 10 generally recognizes this issue, and it has a carefully crafted mechanism to ensure that functional regulation is not undermined and that the kind of problems I just tried to outline don't develop. For example, H.R. 10 gives the Federal Reserve Board general oversight responsibility over the new financial holding companies. It also carefully prescribes and limits the Board's authority over non-bank regulated subsidiaries, such as mutual fund companies, to only situations where the Board believes it is necessary to prevent a material risk to the safety and soundness of an affiliated bank in the holding company, or to the payment system generally.

    So you have kept the Board as a strong umbrella regulator, but you have set up standards to avoid a violation of functional regulation. And the bill, I am happy to say, does the same thing to the second banking agency, the FDIC.

 Page 95       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Now, these standards for the Board and the FDIC were developed late in the prior Congress, and we think there probably wasn't enough time to create similar provisions to deal with the Comptroller of the Currency and the Office of Thrift Supervision. But given the overall intent of functional regulation and the problem of its violation, which Chairman Levitt indicated and I tried to indicate, the bill does have a loophole in this area.

    We think Congress should now take the opportunity to close those loopholes and apply in H.R. 10 the principle of functional regulation, which you have already applied to the Fed and the FDIC, to the Comptroller and the OTS. Otherwise, if you don't, these two banking agencies easily could inappropriately apply bank-type regulation to non-bank entities. This would make absolutely no sense.

    Also, there is no reason the OCC and OTS should have broader authority than that which you assign to the Federal Reserve Board, which is the overall umbrella regulator, or to the FDIC, who is responsible for safeguarding the deposit insurance fund. It is somewhat of a technical point, but I think it is important as you carry out the spirit of your bill.

    The second two comments we have are ones that have already been raised, so they won't be as novel, but they may be as important. First, we do think, and this has been a controversial issue here today, we do think there ought to be a limited degree of nonfinancial activities allowed for the new financial holding companies. If you look at the industry I represent—the mutual fund industry—and other financial industries, they have never been barred from having commercial affiliates, and many of them have commercial affiliates. We don't think they ought to be forced to totally divest themselves of those affiliates if they become subject to the new structure. We think to a limited degree, a commercial basket or something else ought to be done to accommodate commercial affiliates.
 Page 96       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Third, we support changing the grandfather date for unitary thrift holding companies from October 7, 1998 to the effective date of this legislation. Institutions that have become or that have applications to become unitary thrift holding companies after October 7th have acted in full compliance with existing law, and should not be denied an equal opportunity just because of the accident of the date a bill was introduced.

    In short, I appreciate this opportunity to present our views. We have been testifying on this issue for at least 21 years now. We are glad to see the progress, and we really hope that Congress in this session can move toward enactment. Thank you.

    Chairman LEACH. Thank you, Mr. Fink.

    Mr. Smith.


    Mr. SMITH. Good afternoon, Mr. Chairman and Members of the committee. I am Michael P. Smith, President of the New York Bankers Association. From Main Street to Wall Street our association prides itself on diversity and our ability to achieve consensus within this diversity. We are also an organization which, while independent, also prides itself on working closely with our national trade groups and others in the financial services industry to achieve consensus beyond our State's borders.

 Page 97       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Such a consensus existed at the end of the last session of Congress and is embodied in the provisions of the bill now before you. Today we are here to affirm that that consensus continues among our membership and hopefully among the financial services industry at large. The time is now to enact financial reform legislation which will provide an appropriate framework for financial competition in the 21st Century.

    Fortunately, unlike the NFL, you get to reset the clock and hopefully place the ball back on the one yard line. Our association has supported financial reform for more than a decade. To achieve reform, we chose a policy of open markets for all financial service firms to play on the now famous, but still pristine, level playing field. The history of the last dozen years, characterized by globalization, new technology, and unprecedented innovation, has, as the committee knows well, only intensified the need for action. A steady pace of de facto reform has emerged from the courts, the regulatory agencies and the States. This situation has not disserved banking. In fact, many banks would opt for the status quo if rollbacks were to be the price of Federal legislation.

    But this situation will not help us move to a new financial system in the 21st Century. Mr. Chairman, we know that you and your committee desire reform. You have been tenacious, and we would not have this historic opportunity if it were not for your leadership. Your hearings will again lay the foundation for reform. In fact, it would be repetitive to retrace old ground. So I will focus today on the process that brought key changes to H.R. 10 in the insurance area. I will then describe for you the substance of these amendments.

    There is no secret that only a handful of banking firms were supporting the final product which emerged from the House last spring. It is also no secret that banks were fairly isolated in this opposition. The insurance provisions were by far the most vexing to banks of all sizes. These provisions were not reform, they were retrenchment. That certainly was the belief in New York and we made this view known on the Hill.
 Page 98       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    As a consequence, reports were circulating in Washington that the banking and insurance war was alive again. That was the opposite of our experience back home in New York, where in 1997 we joined in a historic detente with our insurance agency groups and strengthened our close ties with the securities and insurance company organizations, the bedrock industries for the future growth of New York and the entire Northeast.

    From our perspective the bank insurance issues have always been a war on two fronts, State and Federal. At the Federal level the unanimous Supreme Court decisions in VALIC and Barnett in 1995 and 1996 established the fact that under Federal law, national banks can sell annuities and have town-of-5,000 insurance agencies that can sell all types of insurance under rules specified by the OCC. The aftermath of Barnett was a firestorm of activity in many States, including New York.

    At the State level in New York, we chose to respond to Barnett by reaching detente with the insurance industry. The guiding principle was functional regulation, where New York banks agreed that insurance activity should be subject to the State insurance department and to certain additional safeguards. In a bipartisan manner, we protected State banks through passage of a wild card statute whose purpose was to ensure that State banks may exercise the same rights and powers and engage in the same activities as their national counterparts.

    In the last Congress, H.R. 10 as adopted by this committee was subsequently revised in the House, which on the whole took a significant step backward for the banking industry. In fact, it had the potential to unravel what had been accomplished in New York and other States. Rather than just oppose the bill, our board authorized us to seek improvements and to be engaged, and the most complex and contentious issue was insurance.
 Page 99       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    When H.R. 10 reached the Senate last summer, the leadership of the Senate Banking Committee on a bipartisan basis specifically turned to us initially to host and then to facilitate negotiations aimed at breaking the logjam on the insurance language, among agents, companies and insurance commissioners and the banking industry.

    These negotiations went on from July to early October. As you know, the differences among the industry groups go back many years. Who on this panel could forget the votes on FDICIA? While the task was arduous, everyone around the table was professional, amicable and respectful, and in the end, the product was very good. Through the process of give and take, we fashioned a document that was probably longer and more complex than many of us would have liked, but that achieved a final balance.

    Many groups not immediately at the table were kept in close touch. I served as Chairman of the State association division of the American Bankers Association, which provided the valuable linkage and partnership with banking's grass roots. Ultimately, all elements of the insurance and banking industries came to embrace the agreement—for the first time in a very long history. As a result also 49 State bankers associations moved from opposition of the bill last spring to 49 in support last fall.

    Before turning to the elements of this agreement, several points should be noted, and this comes up often in our discussions. Our mandate was to work within the framework of the House-passed bill. We were not starting from whole cloth. For example, even though banks in a number of States for years have been butting their heads against subtle, but effective State law that kept them out of the insurance business, we were not at liberty to seek a blanket preemption of State laws that have a discriminatory effect.
 Page 100       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Rather our task was to find a flexible, workable framework for both banks and insurance interests without affecting the consumer safeguards worked out in the House. In the end, we did reach an agreement that allowed each of the participating trade groups to sign off.

    In summary, the agreement included the following particular elements. First, effective preemption of anti-affiliation laws. The agreement contains a healthy new standard prohibiting a State from preventing or restricting any affiliation authorized by the bill.

    Second, effective antidiscrimination language in connection with nonsales activities, by subsidiaries and affiliates. The anti-discrimination section goes to the heart of the bill. Insurance companies that are affiliated with banks must be treated the same as those that are not. In general, States are precluded from preventing or restricting banks and their affiliates from engaging in any activity authorized under the bill, unless a regulation is one of general applicability and does not discriminate against banks on its face.

    Third, a carefully balanced set of insurance sales provisions, including a number of elements, and I would say that this is a compromise. Preservation of Barnett: The holding of the Supreme Court in the Barnett case is expressly preserved and a general standard is adopted that a State may not prevent or significantly interfere with the sale of insurance.

    For new law, new strong antidiscrimination language: for laws adapted after September 2, 1998, the same antidiscrimination standards applicable to nonsales activities would apply. In court cases under this provision, determinations of the OCC and State insurance regulators will be considered without unequal deference, a compromise.
 Page 101       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    For old law, preserving deference in court cases: the OCC would receive deference in any cases addressing laws adopted prior to September 2nd, 1998.

    A modification of the safe harbor for State insurance sales regulation: there was widespread belief that the safe harbor, designed as a specific carve-out for State regulation, was too extensive and could act as an incentive for further State laws adverse to banking. New York was one of the States that had specifically negotiated a set of acceptable standards and felt that the provisions of the House bill were too extreme.

    The safe harbor now in H.R. 10 avoids those extremes while responding to concerns of the insurance regulators, the agents and certain consumer groups regarding new competition from banks. The safe harbor now represents a consensus view of all the interested groups. Could banking have lived without a safe harbor? Absolutely. Could it have been dropped from the bill? Absolutely not.

    Fourth, deletion of the requirement that banks must acquire existing agencies. It was recognized at the start that this provision should be dropped; also modifications were made to the title insurance provisions.

    As you consider these provisions, we pledge to work with you with respect to any questions, ideas or new proposals that may come before you. We know that this is not a static process. At the same time, we would reiterate that the insurance package of H.R. 10 is finely balanced. We earnestly hope that any suggested changes be carefully considered in full consultation with all the parties.
 Page 102       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Like the insurance amendments, there were other significant changes to H.R. 10, which we urge be retained, including the closing of the unitary thrift loophole, and the securities provisions. It is recognized that H.R. 10 is not perfect. There will not be perfection in such a complex document, but it is balanced.

    It is the amalgam of a thousand hours of work by a thousand hands. We were just one of those and, as such, we urge that you proceed in finishing the work which you have so ably fostered. We thank you for the opportunity today.

    Chairman LEACH. Well, thank you very much, Mr. Smith. And thank the panel, and I want to commend in particular the choice of America's Community Bankers in having Ms. Beard speak. You have given testimony that, in one hand, appears common sense, on the other it defies a little bit of history. And I want to go back just a little bit if I could just to review.

    We have to view our legislation as a continuum. That is, it doesn't start with day one. And if you go back on what the S&L industry has been given, we transferred $6 to $8 billion of your industry's liability to Mr. McQuillan's and to Mr. Jones' institutions. That is an extraordinary transfer of obligations. The quid pro quo that was understood by everybody was that we would have equality of regulations, not a privileged circumstance in the market. And what your testimony is doing in effect is saying you want to be in a privileged position, vis-a-vis Mr. McQuillan's institutions and Mr. Jones' institutions.

    We have in the last several years enhanced the thrift charter. We have liberalized the QTL test. We eliminated a multibillion dollar tax liability related to thrift bad debt reserves. We in the United States Congress committed $140 billion of taxpayer funds to underpin the S&L industry; in current dollar terms, 2 1/2 times that if you take interest into consideration. And we have done that knowing the number is going up now, because of certain legal liabilities that exist in the industry.
 Page 103       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    And the reason I raise this is, I mean I want to go directly, because I feel your industry has been presenting one-sided perspectives to its membership. It objects—in your testimony, you object strenuously, for example, that this legislation—and let me find your words here, imposes an additional burdensome notice and comment process.

    Well, that burdensome notice and comment process is called government in the sunshine. It is also precisely what is required of the Office of the Comptroller of the Currency. And so I think it fair to ask you, Ms. Beard, why you object to government in the sunshine and why you believe you should operate under a process and procedures less onerous than Mr. McQuillan and Mr. Jones? I mean if the OCC has a requirement, why shouldn't the OTS? This is very significant.

    Finally, let me just conclude by noting, many might have thought the ACB came out of this legislation rather extraordinarily well. Every community banker I know not only wants to preclude further unitary charters, it wants to cut out those that have been offered, because the theory of the charter was, as put forth in this Congress, to allow more purchasers of failed thrift assets.

    And now it has become something very different. Instead what this bill does is that we leave the thrift charter—the unitary charter intact. We grandfather existing unitaries and we repeal the SAIF special reserve, something your industry wants. I think that is an extraordinarily fair compromise. And given a continuum and a history, I would think of all the institutions before this panel the one that would be the most appreciative of this bill and the most appreciative of the United States Congress would be America's Community Bankers. And instead we have the exact opposite representation.
 Page 104       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    And I throw this out, because it is my view that you have not given a historical representation to your entire membership that is reflective of what I think are extraordinary compromises in this bill and an extraordinarily helpful history of this Congress vis-a-vis your industry.

    I would like you to have a chance to respond to that.

    Ms. BEARD. Certainly. There were several points in there, and hopefully I will remember all of them. But one of them is to make sure it is understood that America's Community Bankers clearly appreciates the Congress and all that it does. And the process that we have in our congressional dealings is that there are opportunities such as this to bring forth issues and to put those issues forward in a very honest way.

    And we think that ACB, among all the industries represented here, is very principled in that we stand for the same thing consistently. At the end of the debate on H.R. 10 issues last year, we had dealt with some compromises that were important and appropriate at the time. We think that now there is a new Congress, and we appreciate that new Congress and their new Members of the Congress, so we think now it is a chance to look again with fresh eyes at things.

    In terms of preferences, you referred to community banks. We consider ourself a community bank. The members of our community call us a community bank. So I think the issue is not the savings and loan industry, the thrift industry, the banking industry; I think it is the financial services industry. A number of years ago, I won't remember the exact dates, what was then—what were then separate industries, the banking industry had a number of difficulties, larger banks were lending outside the country, resources had to be allocated to save that. Banks in Oklahoma were having problems. Resources had to be allocated to that. We are no longer separate industries. So I would argue this is about the industry trying to help itself, not savings and loans or banks trying to help each other.
 Page 105       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Chairman LEACH. I appreciate that. And I will only conclude because my time has expired. The commercial banking side never required a tax bill payout. Second, what I am hearing from commercial bankers, and I mean around the country, is that if you are going to grant someone an unequal charter, which is the current landscape, then we object strenuously to taking on their liabilities in the deposit insurance fund.

    And if they are going to have an unequal charter they ought to pay an unequal part of the insurance fund. And would you like us to go back and change vis-a-vis the insurance fund what we passed in the prior Congress that caused Mr. McQuillan and Mr. Jones' institutions to pick up your institutions' deposit insurance liabilities? Would that be a fair quid pro quo, or would that be an unfair one?

    Ms. BEARD. Well, I think the fair thing to do would be to offer different charter choices throughout the industry. And this is not about one part of the industry having preference any more. It is really about options and choices, diversity and flexibility. And so I would suggest that we expand the powers to other kinds of institutions, too, and not make it preference just for what used to be called a savings and loan or a thrift.

    And if I could just make another point about the sunshine issue, what we are dealing with there is really notice and comment on specific actions. What we would suggest as an alternative would be that perhaps notice and comment could be given for standards under which the OTS or whoever might deal with.

    Chairman LEACH. But would you want to maintain a privileged position versus the OCC, I mean is that your position? What I am saying is that we are trying to do common sense things and equalize regulation and not have anybody left with a privileged status. As it is, this bill grandfathers, which does keep a given amount of privilege, and the quid pro quo that Mr. Jones and Mr. McQuillan asked for is at a minimum that there be no more.
 Page 106       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    And so we have really—what I am saying is we have gone an immense, long way for you against the views of the vast majority of bankers in America, and I just want that message given to your membership.

    Ms. BEARD. We will certainly pass the message on.

    Chairman LEACH. Thank you.

    Mr. LaFalce.

    Mr. LAFALCE. I regret that I couldn't be here for the presentation of the panelists. And I regret that you had to respond, Ms. Beard, to these difficult, challenging questions but you did an excellent, excellent job.

    Ms. BEARD. I appreciate the opportunity to be here and respond.

    Mr. LAFALCE. Good, both substantively and otherwise. Let me—because of the fact that I wasn't here for the presentation—defer to the other Members and then reserve the balance of my time for the time when the others have concluded.

    Thank you, Mr. Chairman.

    Chairman LEACH. Mr. Baker.

 Page 107       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. BAKER. Thank you, Mr. Chairman. I would feel some necessity as a Representative of one of the contributing States to the 1980 difficulties merely point out that anyone alive in 1980 and alive today was probably not a contributor to the ill-advised investment practices that lead to the closure of many institutions in our country.

    And, second, that the RTC, given the responsibility for disposal of assets secured as a result of those failures, in my judgment, did not only the industry, but taxpayers a disservice by selling those properties at bargain basement prices, when history shows that many who invested in those assets, whether they be real property or notes of securities, profited great margin at taxpayer expense.

    Had we managed our way out of that debacle, we perhaps could have limited losses to the taxpayer by considerable measure. Having said that, I certainly understand the concerns of those who see inequities in the marketplace and they should certainly be addressed.

    To that end, Mr. McQuillan, let me ask this question, as I understand the law today, a company, Subchapter S corporation may not in your hometown own the bank or the automobile dealership or the grocery store. But as is the case at least in my State, particularly in small towns, board members, owners of the hometown bank, all too often are the owners of the automobile dealership and the grocery store.

    Is it inappropriate, in your view, given the dangers the complexity of merger of commerce and finance for individuals who may own a small town bank, should we close that dangerous loophole and say that individuals should not be allowed to own the grocery store and the bank? And if not, why is that different in operation from a Subchapter S corporation where three board members join together and decide to buy the bank and the grocery store?
 Page 108       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. MCQUILLAN. Well, the real issue here I think is the risk to the system, the financial services industry and, in the end, the FDIC fund. I can't imagine that me owning a grocery store in Greeley, Nebraska in any fashion would be a risk to the total financial system of this country or the FDIC funds.

    So I do think, even though the concept is obviously the same, it is a lot different than a unitary thrift holding company. The thing that concerns me is the risks to our system of these unitary thrifts if they are allowed to proliferate exponentially how much risk it creates for the FDIC fund.

    Mr. BAKER. If you were given assurances that in your judgment would be enforceable, where the supposed risk from alternative business investment would not have access nor protection from insured depository funds, would that eliminate your concern about commerce and finance?

    Mr. MCQUILLAN. I cannot imagine that happening and I would not support that, no. I just can't imagine that happening.

    Mr. BAKER. So on the one hand it is OK for the company to do it, but not for the individual, even though we know the issue of risk. I don't want to press the issue. It is just important to me to establish that individuals do engage in this enterprise to no great untoward risk to the American citizen, nor is it the case where the unitary thrifts which I understand the concern of your organization—has there been, do you have information that the operation of unitary thrifts over the past decades has led to any higher or more significant risks to the taxpayers or contributed more significantly to taxpayer losses than a typical bank?
 Page 109       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. MCQUILLAN. I don't have any knowledge of that, no, sir, I don't.

    Mr. BAKER. My information is that the losses among unitaries is fairly consistent with that of any other marketplace participant. And it is difficult to understand, particularly in rural America, where you have someone with resources who simply wants to bring in more product and services to consumers, why the government would say that is a bad thing to do when there is not a history or higher degree of loss among that diversified business interest.

    And that really is my point. We want to help consumers in small communities get access to services that a highly regulated commercial bank may not always be able to provide under the current regulatory system. And those of us who feel that the unitary charter or diversified commercial and banking interest is appropriate are doing so on the basis that it is best for the consumer, not worse.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you very much, Mr. Baker.

    Mr. Vento.

    Mr. VENTO. Thanks, Mr. Chairman. I was reminded as you went through that sort of painful history of the last years and addressed the question to Ms. Beard of the efforts to try to harmonize all of these laws at the Federal level, and we haven't even talked about the State. But this bill doesn't address most of what happens at the State level in terms of the powers granted to financial institutions.
 Page 110       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    So invariably, whether it is commerce or operating subsidiaries, we have to rely on the Federal Deposit Insurance Corporation or something to address those functions. And it is just that particular entity all by itself that does that. And I dare say that probably some members of all of your organizations that operate don't differentiate between the charters that have such powers.

    And I don't expect that you are suggesting that we ought to try and solve them in one fell swoop, but the FDIC does address them in that sense. Obviously, the thrifts put a lot of money themselves into the thrift safe resolution, and as Mr. Baker said, the survivors are hardly those that probably warrant the type of challenge that we might still feel.

    I mean I can certainly sympathize with what our Chairman is saying in that regard and having been through this process. But let me turn to Mr. Jones. I appreciate, I just want to note, Mr. Chairman, that about seven of the first ten witnesses here have testified in favor of an operating subsidiary to be addressed here. And in terms of commerce banking, albeit not in the semantics of a basket perhaps, but some have directly addressed that, but in the complementary to financial and/or commercial—or the other verbiage that is in the current bill, H.R. 10.

    But let me turn to Mr. Jones and say, you know, maintaining two holding companies' structures is what you testified to in an operating subsidiary or a holding company affiliate. Why is it important to maintain a choice for banks? Why does the ABA favor that particular position in terms of a choice?

 Page 111       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. JONES. Congressman Vento, I think you know our history on this issue. We support any system that offers the greatest flexibility for the providing of products and services to our customers, whether it be in Red Wing, Minnesota or in New York City. We have been supporters of the operating subsidiary approach over the last few years, because we believe it offers the most flexibility and, therefore, ultimately the most benefit to the client or to the customer.

    So we have been on the side of operating subsidiaries. But this morning, John McCoy testified to the issue of choice. And in each community across this Nation, there will be different banks making different business decisions based on where best to place a particular financial opportunity. Should it be in an operating subsidiary, should it be in an affiliate of the holding company? And I think that is why the issue of choice, freedom of choice, is where we stand today.

    Mr. VENTO. One of the observations is that generally larger financial institutions may favor a holding company type of structure. Is there a factor here that deals with size, Mr. Jones, that makes an operating subsidiary more attractive than a holding company type of structure?

    Mr. JONES. Well certainly, Congressman Vento, in our particular case, and let me take you to our small holding company. We are only about $800 million in total assets. In our case, it would be very cumbersome and very difficult to set up separate operating affiliates in the holding company using what is envisioned. I think we are much more comfortable, with the op sub because there is less cumbersome regulation in the way and structure in the way of delivering this service.
 Page 112       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    But I also am fortunate enough in my role as president of the ABA to talk to many big banks. And it is not necessarily true across the board that large banks only support the holding company structure. In many cases, they would much prefer operating subsidiary approaches as well.

    Mr. VENTO. Because in a branch or another entity they then can reach out? I mean it keeps a viable financial services resource in a geographic location under those circumstances closer to the people that are intended to be served?

    Mr. JONES. Yes.

    Mr. VENTO. Mr. Smith, I was reminded as you went through your testimony of all the flaws with regards to insurance. Those have been rectified, you know, you sort of went through a litany and pointed out that the bill had passed the House, it wasn't really a step forward in terms of financial modernization for banks but a step backward. Am I paraphrasing you correctly, Mr. Smith?

    Mr. SMITH. That's correct, especially in terms of the insurance provisions. I know a lot of the discussion on the other points——

    Mr. VENTO. Well, it did repeal Glass-Steagall.

    Mr. SMITH. In terms of one of the questions that come up often, what does this bill mean for community banking? And the insurance provisions apply to all the banks, for example, in the State of New York, State or national, whatever their size. And for our State and for many other States, the provisions which were constructed in many cases beyond the purview of this committee, for us, took a step backward.
 Page 113       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    For example, the safe harbor provisions were a problem for many of our banks. We were concerned about the provisions dealing with having to buy existing agencies, the provisions dealing with title insurance, and these are generic issues across the whole sphere of banking. And when States like New York, which, following Barnett, as I noted, passed a wild card statute—I believe over 40 States have wild card statutes—were just beginning to benefit from changes in law to sell insurance, we thought the last thing we should have in a reform package were more restrictions or more restrictive law.

    However, at the same time, we were realists. We knew that this was a very contentious item and that it was going to take some time. So we were seeing where the industry was affected. And I think it turned out to be a balance and everyone is on board. But coming out of the House certainly the insurance provisions, with a handful of banks supporting, was one of the main issues with which we were concerned. Obviously, it is a big bill, and the items that we focused in on were the insurance items.

    Mr. VENTO. I am looking at the issue that affects medium-sized or smaller banks and insurance and op subs are two of them, I believe.

    Thanks, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Vento.

    Mrs. Kelly.

 Page 114       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mrs. KELLY. Thank you, Mr. Chairman.

    First, just out of curiosity, I would kind of like to ask a question that sort of establishes something in my mind. I would like to ask you all just for a simple yes or no. Would any of your groups oppose H.R. 10 if it stayed as it was without a commercial basket also known as a two-way street? Let's just start with you, Mr. Jones.

    Mr. JONES. No, we would not oppose; we support it.

    Mrs. KELLY. Mr. McQuillan.

    Mr. MCQUILLAN. I'm sorry, can you repeat the question? If the bill would stay the same?

    Mrs. KELLY. If H.R. 10 stayed as it is without a commercial basket, also known as a two-way street, would any of your groups oppose it?

    Mr. MCQUILLAN. No, I don't believe—I mean what has——

    Mrs. KELLY. Just yes or no. Would you oppose H.R. 10 as it stands now without a commercial basket or that two-way street?

    Mr. MCQUILLAN. No. No, ma'am.

 Page 115       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mrs. KELLY. So, Mr. Jones, you said no. And, Mr. McQuillan, you said no.

    Ms. Beard.

    Ms. BEARD. It is not a question that I could answer. This process is important——

    Mrs. KELLY. No, ma'am. I am asking for a yes or no answer here.

    Ms. BEARD. I wouldn't know what we would answer on that. We haven't evaluated it that way.

    Mrs. KELLY. So your group of bankers would not be able to give an answer? How can they have you testifying if you haven't evaluated what this bill actually means?

    Ms. BEARD. We do not agree with provisions of the bill as it stands now, but we also understand that there is an opportunity for discussion for possible change, which is why we are here today.

    Mrs. KELLY. I asked you a simple question about what it was, and pieces of it that might not be there, even if we do have a discussion about it.

    Ms. BEARD. There are pieces in the current bill that we would not agree with.
 Page 116       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mrs. KELLY. OK. If the bill just stayed as it is, then you would not be in favor of—you would not be able to back H.R. 10; is that correct?

    Ms. BEARD. That would presume there is no opportunity for compromise, and we believe there is.

    Mrs. KELLY. That is my presumption in this question.

    Ms. BEARD. So your presumption is we are at the end of Congress and there is no opportunities?

    Mrs. KELLY. No, I'm just finding out, this is my own interest.

    Ms. BEARD. That is fine. I wouldn't be able to answer it.

    Mrs. KELLY. Thanks. I think maybe you did.

    Mr. Fink.

    Mr. FINK. We would not oppose.

    Mrs. KELLY. You would not oppose it.

    Mr. SMITH. We support H.R. 10 as it stands.
 Page 117       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mrs. KELLY. You support it. Thank you very much, Mr. Smith.

    Actually, Mr. Smith, I am interested in the New York bank's agreeing that insurance activities should be subject to the State insurance department. I find that was something that was very significant in order—in my mind, it had to be very significant to you all, to get some State recognition and some kind of a balanced approach to the insurance and banking provisions in New York State. But you also talked in your testimony about the wild card status that gives State banks parity with national banks, and that is of interest to me also.

    Can you explain what a wild card statute is, and why it is called the wild card statute?

    Mr. SMITH. Well, I can't go back to the history, except that I believe it started out in the West or the Southwest originally so that State banks could keep pace with Federal changes. And as you well know, Congresswoman, New York has a tendency to want to keep and to regulate its own and to set a high standard for its financial services industry. So New York had previously never passed a wild card statute. Wild card, I guess if you take it as a deuces wild, basically allows the State to mirror Federal action at any time that it wishes.

    And in the case of New York, like other States, that would mean that the banking department or banking board would have the authority to mirror change without any legislative change, legislative change taking upward of two to three years, if not longer, to get passed. In which case, in the State of New York for example, we estimated that we would lose many State-chartered banks (as did the State of New York), because of changes due to the Supreme Court cases in Barnett and others.
 Page 118       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    So, therefore, wild card became very important. It required a State law change to get it, and it has worked extremely well in New York. For example, now banks in New York under this wild card statute can sell any form or most forms of insurance. Most recently, property and casualty insurance was approved through a Federal court case and then banking board action in the last year-and-a-half.

    Also at the same time, you ask about functional regulation. That was a big issue, a major issue. Actually, New York faced that in the early 1980's. New York had a commission that was set up by Governor Cuomo that comprised all the elements of the financial services industry, including consumer groups and members of the legislature.

    It came out with many of the provisions that are now in H.R. 10, some 15 years later. It started because insurance companies in New York had a proviso in a bill in Albany to be able to own a bank, and because of that, we had a year-long commission that recommended many of the things that are in H.R. 10 today. One of them was if you want to get into banking, you go under the banking department—by the way, everybody talks about banks being concerned about functional regulation, but it is a two-way street.

    The insurance industry is concerned about getting under the banking department. And quite frankly, many States now are merging their departments. And quite frankly, we believe strongly that if we are going to sell insurance, that it is only appropriate that we be licensed and regulated by the insurance department. And we have accepted that and a lot of people take it for granted, but that was not an easy—that was not easy for our industry, nor was it easy for the insurance industry.
 Page 119       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mrs. KELLY. Thank you very much, Mr. Chairman.

    Chairman LEACH. Thank you, Ms. Kelly.

    Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman. I wanted to just get a clarification from Mr. McQuillan. You were going through a list of six or seven points that you either supported in this bill or I think in one or two cases you maybe had some concerns about. And during that discussion, I thought I heard you say that you felt strongly that the Fed ought to be the oversight body as opposed to the OCC. Did I understand that correctly or did I misunderstood that?

    Mr. MCQUILLAN. On a financial service holding company, Congressman, yes, on riskier activities, yes, they should be the oversight body for the financial service holding company.

    Mr. WATT. OK. But not on the banking part of it, I take it?

    Mr. MCQUILLAN. The umbrella regulator.

    Mr. WATT. The holding company, the OCC would continue to have oversight on the banking part of the operation or who would have oversight?

 Page 120       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. MCQUILLAN. Well, the bank—it depends on what the bank does. But if it is deemed to be a financial service holding company and they have other functions that they are involved in that are risky, for instance, insurance underwriting, those types of things, they ought to be pushed out into the holding company and the Fed should be the umbrella regulator for that entity.

    Mr. WATT. OK. Maybe I should just talk to you separately about that. Let me go to a follow up on what Ms. Kelly was asking. Add to H.R. 10, the Chairman's mark, the possibility of an operating subsidiary. Mr. Jones, does it change your opinion about whether you support the bill or don't support it?

    Mr. JONES. No, Congressman, we would still support the bill.

    Mr. WATT. Mr. McQuillan.

    Mr. MCQUILLAN. It would be a concern of ours depending——

    Mr. WATT. Support it or not support it?

    Mr. MCQUILLAN. What are you talking about, being in the op sub? I guess the riskier activities I would oppose. Is that what you are saying?

    Mr. WATT. Well——

 Page 121       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. MCQUILLAN. It would have to be, that is all it is saying. So I would have to oppose.

    Mr. WATT. OK. Ms. Beard didn't have an opinion on the last one so I guess she is not going to have——

    Ms. BEARD. As to simply the operating subs, we would believe the operating subs would be——

    Mr. WATT. I am talking about the whole bill. So if you don't have an opinion on the last one, than I take it you don't have one on this one.

    Mr. Fink.

    Mr. FINK. It would not change our support.

    Mr. WATT. Mr. Smith.

    Mr. SMITH. We would support.

    Mr. WATT. Add some modest basket not to exceed 15 percent. Mr. Jones, do you support the bill or do you oppose it?

    Mr. JONES. We would continue to support the bill, but we believe 15 percent may be a bit high.
 Page 122       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. WATT. OK.

    Mr. McQuillan.

    Mr. MCQUILLAN. We would oppose.

    Mr. WATT. Mr. Fink.

    Mr. FINK. We would support much more enthusiastically.

    Mr. WATT. Mr. Smith.

    Mr. SMITH. Our association is neutral on the basket.

    Mr. WATT. So if you were supporting the bill before then you would support it this time?

    Mr. SMITH. I would say we are neutral on the issue.

    Mr. WATT. OK. All right. I was just trying to figure out where the players are. Just as a matter, since I've got a half a minute left, Mr. McQuillan, why does that last wrinkle—just explain to me quickly while the last wrinkle scares you off of supporting the bill.

 Page 123       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. MCQUILLAN. Banking and commerce is just a line that we do not ever want to cross, anything over zero percent.

    Mr. WATT. But what if you put it up in the—you went back to the holding company concept, no op sub, you put it up in the holding company, then what is your opinion on it?

    Mr. MCQUILLAN. Banking and commerce is just a line.

    Mr. WATT. So it would still scare you away, OK.

    Mr. MCQUILLAN. Too much risk to our financial system.

    Mr. WATT. All right. Thank you, Mr. Chairman. I yield back.

    Chairman LEACH. Thank you. I think next is our distinguished gentleman from the far West.

    Mr. HILL. Thank you, Mr. Chairman.

    Mr. Smith, first let me begin by complimenting you on what you did achieve with regard to the negotiations with regard to insurance. Then let me ask you some questions about what I see as problems in part of that agreement.

    The current language in H.R. 10 does not have the support of State insurance regulators; is that right?
 Page 124       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. SMITH. That's right.

    Mr. HILL. And the reason for that is because they believe it preempts authority they think appropriately belongs to them, would you agree with that?

    Mr. SMITH. That's correct.

    Mr. HILL. And it isn't so much the affiliation issue as it is regulating sales and regulating matters regarding solvency that concerns that. Would you agree with them?

    Mr. SMITH. I would defer to them. I don't know whether they are testifying, but I don't want to speak for them. But they were in our discussions early-on and made their views very clear, and I think those views were articulated before this committee during its markup or hearings last year.

    It was a fundamental issue that I can tell you right now concerned the banks and the insurance companies. It was also the direction the U.S. House of Representatives and the Congress were moving forward to. We can't just cede authority to a State to intervene on affiliations. For example, there was a whole debate on this. It is a fundamental issue.

    It was clear that we were not going to be able to as a group agree on their position. So the decision was that there were modifications made in the Senate bill regarding disclosures that they could request on affiliations, imposing capital requirements, on subsidiaries operating in a State, and that was as far as we could go. So you are correct, and it was felt to be as good as we could get.
 Page 125       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. HILL. I mean we don't really have functional regulation in terms of the traditional history with regard to insurance regulation.

    Let me go on. I admire your work because I found that dealing with this issue kind of like Middle East politics, there are three positions. There is the public position, the official position and the real position. So sometimes it is hard to figure out just really what you can and can't do.

    One of the other concerns that I have frankly is what you referred to as a noncompetitive title insurance provision. Since I was the author of the provision that went into H.R. 10, I particularly take issue with that description. And, frankly, because really H.R. 10 as it now stands would substantially leave title insurance, in my view, unregulated, at least so far as consumer protection is concerned, and basically would leave it I guess to the OCC to write regulations of title insurance sales since it is your view that should occur within the bank or within a subsidiary of a bank; is that correct?

    Mr. SMITH. Well, can I just go back one minute to this question of functional regulation? There is no Federal regulator of insurance, to my knowledge. De facto, the insurance regulators of each of the 50 States are the regulators. It is understood. Now I know that has been an issue. And I know it is debatable and you can debate that in academic terms, and quite frankly I heard a lot of that debate. But the facts are that in the State of New York at least the insurance commissioner is the regulator of selling insurance. And I would believe, but I don't want to misspeak, that the insurance commissioner would maintain that authority in the sale of title insurance, as it is my understanding that a State bank in New York can do that today.
 Page 126       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. HILL. If we were to debate that we would say so long as it doesn't interfere with the powers of a bank, the national bank?

    Mr. SMITH. Only interfere to the extent of discriminating to the extent that the bank in effect could not participate in that product.

    Mr. HILL. Let's go, for example, to the Ohio situation, which right now is being litigated, where the State of Ohio requires that title insurance companies generate 50 percent of their revenues from someone other than their affiliates. That is being challenged, as I understand it, under the principles of the Barnett decision that there is a significant interference.

    Mr. SMITH. Correct.

    Mr. HILL. Under H.R. 10 as it now stands, deference would still go to the OCC if the OCC determined that there was significant interference, correct?

    Mr. SMITH. On current law, correct.

    Mr. HILL. Current law. So that leads the OCC to determine whether there is going to be any regulation or not any regulation in that event since the State would be preempted, right?

    Mr. SMITH. You still would have litigation. But at the same time, from being in the talks, I can tell you from banking's perspective, obviously, banking's view did not prevail. Banking would have preferred that that law would be preempted, because it created in fact a discrimination and would have preferred to preempt State laws, as I mentioned. That was not in the cards. So you have this litigation process. And so basically you have current status on current laws as it relates to the Ohio statute.
 Page 127       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. HILL. The problem I see here, and my time is expired, is that with regard to other forms of insurance sales, H.R. 10 in essence preempts the State regulation by setting forth regulation. But it isn't going to do that in title insurance. And so I guess I would just conclude by saying that the concern that I have is that I think there are serious concerns for consumer protection with regard to title insurance being sold by the people who are the primary beneficiaries in the insurance.

    Mr. SMITH. My understanding, Congressman, is——

    Mr. HILL. And that is really left without any protection now in my view.

    Mr. SMITH. My understanding, Congressman—we would get back to you on this, and to the panel—that banks are selling title insurance today, and I believe they would be regulated by the State insurance department. And the safeguards that are in the H.R. 10 today are the so-called safe harbors, which give to the State regulators very clear authority to act in those number of items. So there is relegation to the States, a very clear delineation on what the States can do, and it was explicitly a compromise. And by the way, the safe harbors emanated from the House.

    Mr. HILL. One last point then, we are—are there any title insurance interests that support this provision of the bill? Were they part of these negotiations?

    Mr. SMITH. No, they were—in fact, title insurance, I mentioned title insurance in my statement specifically as a matter that the banking industry was deeply concerned about. It was not from the insurance sector that is coming up afterwards, they did not have a position or did not—this was banking's view that the provisions coming out of the House were unacceptable, and the title insurance association—I don't want to speak for them, I believe they were opposed.
 Page 128       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. HILL. OK, thank you, Mr. Smith.

    And thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Hill.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman, and I apologize for being late.

    Mr. Jones, you said that you would support H.R. 10, is that the position of the ABA? And the reason I ask that is, you know, I may be wrong, but H.R. 10 I believe in dealing with the operating subsidiary uses the language that was in the last Senate compromise which, if I understand correctly, would set a billion dollar asset cap, is that correct, on the ability to have an operating subsidiary?

    I yield to the Chairman.

    Chairman LEACH. On the billion dollar cap that is one of the ideas that has circulated for a month or two, but it is not in this bill. This is the Senate language on——

    Mr. BENTSEN. Which is open ended for investment banking purposes, securities purposes?
 Page 129       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Chairman LEACH. I don't know if the term ''open ended'' is appropriate. But it is—but you can only do agency in the op sub.

    Mr. BENTSEN. So it is restricted, more so——

    Chairman LEACH. It is more restrictive than what passed the House Banking Committee last year.

    Mr. BENTSEN. But what passed the House Banking Committee. But the ABA would support that?

    Mr. JONES. That's correct, Congressman.

    Chairman LEACH. Excuse me, I don't want to interrupt. I don't want to speak for Mr. Jones. I think Mr. Jones is referenced to supporting H.R. 10 as introduced this year.

    Mr. JONES. That's correct.

    Chairman LEACH. Rather than otherwise; is that right?

    Mr. JONES. That is correct. That is what I am referring to.

    Chairman LEACH. That is what you meant?
 Page 130       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. JONES. That is what I meant.

    Mr. BENTSEN. Sorry, go ahead.

    Mr. JONES. The Chairman is exactly right. We are in support of H.R. 10 as introduced this year before this committee. It is fair to say that in the last Congress we were in support of H.R. 10 as it was working its way through the Senate, but we are fully supportive of H.R. 10 as it appears before you today.

    Mr. BENTSEN. Would the ABA's position be limited to that? Is the ABA no longer interested in the broader operating subsidiary?

    Mr. JONES. As we have all been asked a series of yes or no questions——

    Mr. BENTSEN. I will give you more latitude than that.

    Mr. JONES. I appreciate that. But I feel sorry for Ms. Beard, who was put into that position. Let me tell you that the ABA still believes very strongly in a number of its closely held positions, one of which is that the freedom to choose, which Ms. Beard referred to in my testimony, should be there for operating subsidiaries. But we do not think that a bill should be stopped because of this issue. It is for us more important to see a bill move than to argue this point to the end of the earth.

 Page 131       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. BENTSEN. OK. Mr. McQuillan, the IBAA is opposed to the commercial basket concept. Would the IBAA support a more structured commercial program that—I mean, the Chairman talked today about incidental to finance; although that may not be broad enough. I mean would the IBAA support a financial modernization that gave a bank through, in my preference, an operating subsidiary, but even through an affiliate, the opportunity to engage in merchant banking activity, assuming it was safe and sound and separately capitalized, the ability to take positions for its own account and some latitude in the commerce side beyond what is in H.R. 10, but perhaps not as far as in Mr. LaFalce's bill?

    Mr. MCQUILLAN. The way I understand your question is merchant banking insurance underwriting and those types of—what we deem riskier issues should be pushed out into the op sub; so if they are not there, then we would probably, if that is your question, we wouldn't support anything that wasn't pushed out.

    Mr. BENTSEN. But you would support some commercially related ventures outside the bank either through a subsidiary or an affiliate within the holding company structure?

    Mr. MCQUILLAN. No, not any more than has already been introduced.

    Mr. BENTSEN. OK. If I could very quickly, Mr. Chairman.

    Ms. Beard, has the ACB given thought to—and I am sympathetic to your position on the unitary thrift, but has the ACB given thought to some form of a grandfather provision that preserves current unitary charters that—and perhaps even some in application, I don't know, that is another can of worms, but preserves the power of the current unitary charters and allows for transfer in all cases, except to other commercial entities, or is there a particular problem with that type of transfer prohibition, sale prohibition?
 Page 132       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Ms. BEARD. To answer your question specifically, we have given it thought, and there are a number of compromises that might end of up having to come forth by the time all of this is dealt with. But in terms of not being able to transfer our institution as an example, we have that transfer right now and our stockholders understand that transferability is there.

    So to go back to them and say the rules changed after the fact, when there has been no demonstration of risk to the funds, for example, or to the industry would be difficult.

    Mr. BENTSEN. And with the Chairman's deference, you would—I mean could you tell us if you can't sell your institution to another commercial entity, but can sell it to the market or sell it to another thrift or a bank, does it have a significant effect on the asset value of the institution, you believe, or the market value?

    Ms. BEARD. I believe it has an effect, I don't know the significance. I couldn't quantify that for you because we haven't had to face that as an institution. But I believe it would have an effect.

    Mr. BENTSEN. Yes, sir.

    Mr. JONES. Congressman, if I could just add one more thing on that issue. Obviously, the ABA is coming from a different position on this. But I think Ms. Beard talks about limited choice to sell her institution to another commercial entity. In fact, there are some 10,500 potential purchasers of her organization that are amongst the thrift and banking communities. So we see very little, if any, problem in terms of choice to sell her institution or her members' institutions.
 Page 133       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. BENTSEN. Thank you.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you.

    Before turning to Mr. Ose, let me just mention, you mentioned the word incidental. Earlier in the hearing I threw out the combined term ''incidental'' and ''complementary,'' too, which is a fractional broadening of a given precept.

    Mr. Ose.

    Mr. Sweeney.

    Mr. SWEENEY. Yes, thank you, Mr. Chairman. I, as well, will apologize to the panel for having missed your testimony. But I did take the opportunity to read some of your testimonies and study the variety of the issues. And I found myself relying on those things that I knew a little bit about, and I will emphasize a little bit.

    And, Mr. Smith, I appreciate the work both of your group and you personally in New York and in this venue in forging the agreements between banking and insurance industries. You have spoken a little bit about some of the preemptions that might occur with Federal law.

 Page 134       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Could you characterize in those deliberations what you anticipate—outside of New York, because New York is less in contention at this point—could you characterize the level to which State laws would restrict the sales of insurance and which would be preempted in the current H.R. 10 language? I am interested in the volume and what you anticipate in terms of how difficult it would be to transition.

    Mr. SMITH. Well, it is not a simple answer. The bill as it stands today does to a great extent protect State laws. There was no issue that from the first meeting there was going to be ''preemption of State laws.'' However, there was going to be an exception in the affiliation area for companies, but in the sales area it was going to have to be a very delicate balance. It has already been referenced, the Ohio statute.

    There are other statutes in the United States like that that are on the books today that clearly would elicit strong opposition from the other side, if they were preempted. So, therefore, that is why you see what you have today, which sounds difficult to explain, but which is a bifurcation between current law, those laws on the books, preserving what basically is in the law, and then a very strong statute going forward on nondiscrimination and leaving OCC deference out in prospective law.

    Those are all very delicate balances and agreements that were made which quite frankly took a lot of time. And the safe harbor, too, is designed not to be preemptive in nature. There are banks and there are people who have criticized the safe harbor. And as I said in the testimony, we certainly could live without a safe harbor.

    It is there for one reason, to preserve in certain very distinct areas, and they are not small areas, insurance regulation in the States. And they are there because quite frankly the industries involved wanted to have legislation.
 Page 135       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    And it was very clear that there was not going to be legislation if there was not some balancing and compromise. And it is just not to say this law is preemptive: this law is not, would not give justice; what it does is allow States to move forward like New York. And I am not saying New York just because I come from New York, but we have a pretty vibrant insurance industry in New York, and 50,000 insurance agents and 200,000 bankers.

    And, quite frankly, we sat down and decided that as long as there were proper disclosures, licensing enacted by the insurance department for bank insurance salespeople, let's get on with it, and that was the decision. And Ohio statutes, as Mr. Hill has pointed out, Ohio statutes are going to be litigated under H.R. 10 as they are being done today, because we felt at these talks that we could not solve those issues and the delicate balance would be broken.

    Mr. SWEENEY. Are there other jurisdictions that have made that kind of a determination that we could potentially face that kind of litigation? Is there that?

    Mr. SMITH. Oh, yes. Yes. There are States in the United States where I am sure some Congressmen and Senators are hearing that, despite the agreement, that they feel that this is a preemption of their State's insurance laws. And at the same time, you always know you have a balance when you have got banking interests saying we don't agree with the safe harbor, we don't agree with this bill because you should have gone for preemption.

    So, yes, there is going to be a discussion of this and I believe debate as you go along. What you had before you today was quite frankly the best we could do, and I hope that the insurance panel which follows would concur in that.
 Page 136       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. SWEENEY. As I try to put my arms around the issues, I would like to have some further discussions of where those controversies may come from. But as my time runs out, I have one other question for you. In your testimony you credit the New York bankers' support for modernization stemming from the 1984 commission recommendations. Could you very briefly give me a thumbnail sketch of those recommendations?

    Mr. SMITH. I mentioned earlier that the insurance industry supported a bill in the early 1980's, which would have allowed insurance companies to own banks, a fairly novel idea at the time. We came back and said that we should be able to own insurance companies, and the governor and the legislature said we can't solve this, let's have a commission.

    And what came out of that commission, quite frankly, were many of the provisions that are in H.R. 10 today. They were never passed in New York, I might add, over 15 years. And quite frankly, it was only the court cases in the last three years that brought forth all the changes both in New York and in the provisions in H.R. 10.

    Mr. SWEENEY. I have one final question for Mr. McQuillan. Mr. Jones has spoken to the advantages of having choice and some of the competing regulatory structures, if that is a fair characterization, whether it is op sub or the holding company structure. Could you indicate to me what you think some of the deficiencies are? How does having different regulatory frameworks in any way undermine the goals of making the financial services industry more competitive?

    Mr. MCQUILLAN. Well, this speaks to—I mean different regulators are in my mind a viable alternative of the system and should continue. But as it relates to these—what we have deemed riskier activities, merchant banking, insurance underwriting, securities underwriting, those types of things, we feel that they should be pushed out of the op sub and put into the bank holding company, and that there should not be a choice there as it relates to those activities. That is what I was speaking to.
 Page 137       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. SWEENEY. OK. I yield my time.

    Chairman LEACH. Mrs. Jones.

    Mrs. JONES. Good afternoon. Stephanie Jones from Cleveland, Ohio, District 11.

    First of all, I want to say that I am so glad to see E. Lee Beard seated at these tables. It is not that I don't like good-looking men, but it is nice to see that the banking industry has allowed women to make it to the top. So I want to applaud you for being at the table on behalf of all of the women who bank all of our money.

    I would say I have a question with regard to the testimony of everyone seated here, though I didn't hear, I tried to cursorily read through it. With regard to no discussion with regard to consumer protection or the Community Reinvestment Act, can I be—can you be heard at least briefly on those two issues, please, each of you, or your representative, whichever you choose?

    Mr. JONES. I would be happy to start, Congresswoman. Currently, I think consumer protection issues are addressed in this bill. There are lots of disclosure issues included here which go down the road that you are talking about. I think any time we talk about consumer protection issues, we have to strike a balance between access to those services and protection of the consumer.

 Page 138       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Now, what do I mean by that? What I mean is that if we take a look at some of the real estate laws that are in place today, some of the regulations that banks and thrifts have to comply with, the consumer is asked to read and sign literally inches of paper, most of which the consumer never reads. It makes access more difficult; it makes the costs go up. But certainly reasoned consumer protection is something that we as an industry do agree with.

    Relative to the CRA issue that you bring up, the CRA issue, I would defer to what John McCoy said to you early this morning, and that is that the intent of CRA is not something that the banking industry disagrees with. What the industry has disagreed with over time is the evolution of CRA into really a paper based compliance system as opposed to something that really drives change and capital into the neighborhoods of this country. That is what we oppose.

    We would not oppose a bill that had neutral CRA provisions in it from what the law stands today. Because, again, I go back to my earlier comments to say that the most important thing to us is to advance financial services reform.

    Mrs. JONES. I don't know quite how much time I have. Would you explain to me what you mean by neutral CRA provisions for me, please?

    Mr. JONES. No additional CRA provisions, no expansion of CRA beyond its current structure.

    Mrs. JONES. Because?

    Mr. JONES. Because every time we do that, as we have several times over the years since 1977, it has become more and more a bureaucratic nightmare for banks as opposed to something that drives performance into the communities.
 Page 139       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mrs. JONES. Do you have a study that speaks to that issue that is more bureaucratic than driving support within communities?

    Mr. JONES. Well, we certainly can show you the evolution of CRA over time and how it has become more bureaucratic. I still go back——

    Mrs. JONES. The thing I am trying to be clear on with regard to CRA—and keep in mind, I am new at this. But in Cleveland, at least it seems that we are seeing a greater activity in our communities in terms of development, people moving back into the city, opportunities for reinvestment.

    So I am just suggesting that maybe it might not be necessarily the statutory implementation of CRA or the paperwork, but it may be the way in which it is administered in particular communities, and it looks like I am almost out of time. But could you respond to that for me, please?

    Mr. JONES. I sure can. Actually, I go back to my initial statement where I said the intent is not wrong in anything that we disagree with. I think what financial institutions have understood for some time, although maybe not back in 1977, is that development, community development lending and lending of all kinds in low to moderate income communities is, in fact, and can be very good business for the banking industry.

    And so I believe that is what is driving this more than the paperwork that is developed behind CRA. We are making more loans in the communities of this country because it is good business.
 Page 140       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mrs. JONES. OK. Mr. Chairman, could I have one more minute?

    Chairman LEACH. You have a little bit of time left.

    Mrs. JONES. I still have time left.

    Again on CRA, how do you monitor or measure the accountability for CRA within your institution? The only gentleman I have been talking to, thanks.

    Mr. JONES. In our institution, we go through quite a bit of analysis on how we are lending within our community. We look at not only where we take deposits from each different area within the community, but also where we make loans in each different area of the community. In addition to that, we look at some things that aren't even envisioned in CRA.

    We look at the amount of contributions that our organization is making to worthwhile community activities. We are looking at mentorship programs and all sorts of other things that are outside the bounds of CRA. But to answer your question——

    Mrs. JONES. Are you seeing any benefit from it?

    Mr. JONES. Are we seeing a benefit from CRA? I will tell you we would do exactly the same thing even if CRA were not there, and the reason that we would is that it is good business, and it is the right thing for the community.

 Page 141       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mrs. JONES. Break my heart, now come on.

    Mr. JONES. I am serious. I am serious.

    Mrs. JONES. Now that you know that CRA is important to the United States. But prior to its enactment, you couldn't make that statement, could you?

    Mr. JONES. I think I was only 22 years old prior to that.

    Mrs. JONES. Speaking for your institution, OK? I am out of time.

    Mr. MCQUILLAN. Could I add one thing?

    Mrs. JONES. Please.

    Mr. MCQUILLAN. I am from a community of about 600 people. And I have been in larger banks and small banks, and I think banks are committed to CRA, certainly most of our banks across this country invest in our communities, I mean it is good business. There might be certain spots in this country that might not be as committed as others and certainly you are probably referring to some of those. But I can tell you that in my community, if the bank—if I wasn't there, the community wouldn't survive. I mean I am the only bank in the community. And we do this day in and day out and we live with it.

    Let me add one more point that Scott didn't, and I agree with his thought. And that is on WFIs. We have WFIs on this bill, and I believe that any institution that operates in this financial world should have to have the same type of regulations that the rest of us do. So I would think that WFIs should have that situation also—and credit unions.
 Page 142       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mrs. JONES. Anyone who didn't get a chance to respond to me, I'm sure that somebody in the back would like to say that. I would request anyone who did not have an opportunity to respond orally to me to submit some responses in writing for the record. I would be appreciative.

    Thank you, Mr. Chairman.

    Chairman LEACH. Well, thank you, Mrs. Jones.

    Mrs. Biggert.

    Mrs. BIGGERT. I seem to have lost the microphone. Thank you, Mr. Chairman.

    I would like to ask just one question of Mr. Jones, and I am from a State, Illinois, that has had—probably was one of the last States to have branch banking, and then is very viable I think with the financial institutions, but we have had an awful lot of mergers and consolidations of banks and ownership by foreign banks. And I was just wondering is what do you think of the—is there any impact, if we were not to pass a comprehensive financial modernization bill with respect to U.S. banks' ability to compete internationally?

    Mr. JONES. I am glad that question surfaced. I will tell you that the biggest defense that any banking organization has, whether it is large or small, to being taken over by another institution, foreign or domestic, is good strong earnings performance. In our particular organization if we generate the proper returns for our shareholders, they are quite happy with their investment and don't need to look elsewhere for a new owner.
 Page 143       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Having said that, what H.R. 10 does is allows the banking industry to diversify its earnings stream, to generate new sources of revenue that will not only supplant, but hopefully exceed some of the lost revenues coming from smaller spread income between the traditional banking side of our business. So it is a terribly important thing to defend against being taken over, but also to generate more safety in the system, because of greater and more diversified earning streams.

    Mrs. BIGGERT. Thank you. And then, Mr. Smith, I know we will have a panel on insurance. But from the banking community, as far as selling insurance—I know that in H.R. 10 last year, I was not here, but having been involved in banking and the issue of insurance in Illinois, and I know that there were certain standards that were set forth in that bill and understood that that was somewhat of a model for developing the insurance part of this. And it is my understanding that those standards are no longer included in this, and why the change in that?

    Mr. SMITH. No, you are correct, Congresswoman, that the Illinois standards actually were the standards, most of them, coming out of the House. And that was really an earnest negotiation in the House; however, when it got out to some of the States, not just New York, but other States, looking at those so-called safe harbor features, they were more extensive, they were more burdensome than some of the features that existed in New York and other States. For example, they required separate facilities, issues dealing with disclosure, cross marketing, that created problems.

    And the concerns that States like ours had was that these features then would put pressure on the New York State legislature to mirror the Illinois statute and then Illinois law would become the law of the land. So, therefore, it was through negotiation and discussion with all the parties that we agreed on a set of features, some of which include the Illinois features and features from New York and other States. So the Illinois standards were not just discarded.
 Page 144       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mrs. BIGGERT. So you think that some of the concerns of the insurance regulators and agents and certain consumer groups that the standards that are in there now are——

    Mr. SMITH. Let me just say for the State of New York, which includes all of those parties, the consumer groups in New York, the State legislature, the insurance department, companies and agents all supported these features as part of New York law two years ago and signed off on it. So, you know, that element of the industry and then our group, the individuals in our group, also signed off as national organizations. Many of the provisions, Congresswoman, include the consumer protection items.

    Mrs. BIGGERT. Thank you.

    Thank you, Mr. Chairman. I yield back my time.

    Chairman LEACH. Well, thank you. I am glad that a citizen of Illinois is defending the State's judgment versus a New Yorker.

    But please, Mr. Green.

    Mr. GREEN. Thank you, Mr. Chairman.

    I guess I just have one question at this point, it is for Mr. Smith. Now, your organization obviously represents a diverse group of banks. Comment, if you will, on why you consider closing the unitary thrift charter loophole to be so important to this legislation?
 Page 145       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. SMITH. It has been discussed earlier, and I concur certainly with Mr. Jones, because our association supports the bill. We believe it is very important, especially to community banks throughout the country. We would concur with the Chairman's statements at the outset. We can recall the deposit insurance issue, the so-called Frist amendment, dealing with the mergers of the charters and the mergers of the funds.

    Quite frankly, the New York Bankers Association supports so-called chartering up, which is taking the best features of all the Federal institutions and putting them into one charter. However, those features or any discussion of that was dropped in the final House version in 1997.

    We believe what we have today to be a compromise. It doesn't do away with the unitaries. It has grandfathered certain unitaries at a date certain. And we feel it is extraordinarily important to the community banking sector throughout the country. What was agreed to in the Senate is a date certain for closing the loophole and you can't sell a unitary to other commercial firms. That will allow us at some point in time to deal with the broader charter issue, which quite frankly we do not believe at this time or in this bill will be resolved.

    Mr. GREEN. Thank you, Mr. Chairman. I yield back the balance of my time.

    Chairman LEACH. Thank you, Mr. Green.

    Mr. LaFalce.
 Page 146       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. LAFALCE. Thank you very much, Mr. Chairman.

    First of all, I want to congratulate my long-standing friend from the State of New York, Mr. Michael Smith. Michael and I have known each other for a long time. And I honestly think, Michael, you are more responsible than anybody else in this room right now for the advancement of financial services modernization and you did tremendous work, especially toward the end of the session, working so closely with the office of Senator D'Amato and Howard Minell and the predecessor to Howard Minell, Neal Levin, who wore two hats, banking superintendent of New York State and then insurance superintendent.

    But I am also a bit aware of the evolution of thinking that has taken place within the New York State Bankers Association prior to summer, fall of October 1998 when there was considered an imperative need, prior to the decision of Citicorp and Travelers to merge, and so forth. And it is always interesting to see how perspectives can change, depending upon a changed environment.

    But we have advanced considerably and because of your great work, Chairman Leach and I have much in common in our respective bills. So much of it, his bill and my bill, is based upon that work, that work product, much more in common than we differ on.

    All right. Now having said that, let me ask a few little questions. Congresswoman Kelly wanted some yeses or noes. And I will try not to be quite that bad. But let me just say, Mr. Jones, pro-choice or anti-choice? Operating subsidiaries, pro-choice, anti-choice?

 Page 147       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. JONES. Our position is for the greatest flexibility that would seem to suggest—I just can't use the word. We would be for choice.

    Mr. LAFALCE. OK, good. So you indicated to Congresswoman Kelly that you could support H.R. 10. Would you support it more enthusiastically if you had choice with respect to corporate governance?

    Mr. JONES. This is an issue that is fairly far down on our list of priorities. We could support the bill either way.

    Mr. LAFALCE. Let me ask you this. Would you prefer to have a bill sent to the President that the Secretary of the Treasury would recommend signing or would recommend vetoing? What would your preference be?

    Mr. JONES. That is a very clear question, and I would prefer a bill that could be sent that could be signed.

    Mr. LAFALCE. All right, good, thank you. Now, let me go on and ask a few more questions. The Independent Bankers Association, just back to operating subsidiaries. Now, was there an evolution in the thinking of the IBAA at one time, did the IBAA really want operating subsidiaries, and then did they change their mind and say, now, somehow we have seen the light and don't want operating subsidiaries? Did you go from a pro-choice to an anti-choice position?

    Mr. MCQUILLAN. There is an evolving process.
 Page 148       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. LAFALCE. I just want to understand the evolution of it.

    Mr. MCQUILLAN. I'm sorry?

    Mr. LAFALCE. I want to understand the history of it. Am I correct that at one time you favored the operating subsidiary approach and then there was a change in thinking?

    Mr. MCQUILLAN. As it related to the risky activities, I am not aware of that.

    Mr. LAFALCE. OK. Good. Let me go on. I am going to come to you a little bit later, Ms. Beard.

    Mr. Fink, I think you would favor greater choice and corporate governance.

    Mr. FINK. No, we don't have an opinion one way or the other.

    Mr. LAFALCE. You don't have an opinion. OK. You want no choice. Let me ask something else though, and that is the whole question of the potential for some relationship between banking and commerce. I mean that exists right now. I mean it exists to a certain extent on a State level through State chartered institutions. It exists to a certain extent on a national level with respect to operations overseas, with respect to domestic banks. It exists with respect to SBICs. And it has existed historically with respect to the unitary thrift holding companies.
 Page 149       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Do you favor an approach that would permit a continuation at least of the experimentation that we have had?

    Mr. FINK. Even more strongly. Because if I can, Congressman LaFalce, I think a problem is that you have had this bar for banks; you have never had it for securities firms; you have never had it for insurance companies, I believe. And I represent mutual funds. We started in 1924, and there were a series of mutual fund groups that have historically had commercial affiliates.

    So we have never had a commercial prohibition. Now Congress may say ''we are going to create a brave new world, we are going to have all of these different financial firms able to affiliate.'' And I am lost as to why we automatically choose the banking model as the model and now we have to talk about whether we vary from a banking model. If I were doing it, with all due respect, I would probably have no bar, because that is the world I grew up in.

    But in the interest of compromise, I would think a basket would be appropriate at least to accommodate those mutual fund and other non-bank firms that have had commercial affiliates with no problems for decades—for 50 years. Why suddenly say they have to be stopped when there is no evidence of abuse? It hits me that a basket, I don't know if that is what you are asking for, or some exception, is the least that ought to be done.

    Mr. LAFALCE. Or at least don't go backward.

    Mr. Smith, you said something, you said you cut a deal in an accommodation based upon your—but you really favor charting up whenever we could get to it. You said that. I think you used the phrase chartering up. What do you mean by chartering up, Mr. Smith?
 Page 150       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. SMITH. Well, I think it is a word of art that people have used for some time now to say to take the best features of all the various charters, like they have I believe in Maine, where they have a universal bank charter.

    Mr. LAFALCE. Does that mean you sort of like some of the things that the thrifts or unitary thrifts can do and you wouldn't mind having them for yourself?

    Mr. SMITH. The question was within the context of the unitary feature and how it is treated in H.R. 10. I believe the industry, meaning the banking industry, not our group, never got in Washington to the point where you were dealing with the charter and you had agreements on a charter proposal. And I know you had a provision in the House Banking Committee, but it was deleted so, therefore, all the features regarding the thrift charter were knocked out, and the one thing that was left that was of most importance as a residual was what do you do you about the unitary?

    Mr. LAFALCE. Would I be unfair, Mr. Smith, if I characterize your position as this: You really like chartering up, that is, what the unitaries have at least. But until such time as you get them, you don't want them to have them, and you feel maybe the best way for you to get chartering up is to charter the others down first?

    Mr. SMITH. Well, what we would like to do, quite frankly, Congressman, and I appreciate your remarks——

    Mr. LAFALCE. No, you don't.
 Page 151       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. SMITH.—I appreciate your earlier remarks.

    Mr. LAFALCE. OK.

    Mr. SMITH. I can tell you what we would like. We would like to have a bill. We support a bill, the industry is deeply concerned, the banking industry and Scott Jones has already said this, the industry is deeply concerned about the unitary thrift. We do not believe that the issue of the overall charter is going to be dealt with at this time. And, therefore, as it is treated in the current bill is something that we support as an industry, and we strongly support, and leave it at that.

    Mr. LAFALCE. Fine. I think my time has expired. The Chairman has been indulgent.

    So, Ms. Beard, if you don't mind I won't ask any questions.

    Ms. BEARD. Not a problem.

    Chairman LEACH. Mr. Gonzalez, would you like to ask some questions?

    Mr. GONZALEZ. No questions. Thank you.

    Chairman LEACH. I think that brings this panel to an end. And let me thank you all and let me just stress to Ms. Beard that I wish to separate personality from words.
 Page 152       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Ms. BEARD. That is very important.

    Chairman LEACH. And I can't think of an institution that I would rather have an account with than one that you head.

    Ms. BEARD. Thank you.

    Chairman LEACH. But I apologize for having some difference with your association's position.

    Ms. BEARD. I think that is an important part of this process, is to be able to bring those differences forth and to deal with them honestly.

    So I thank you for the opportunity.

    Chairman LEACH. Very well. Well, thank you all. I appreciate it very much.

    On our third panel we have representatives of all facets of the American insurance industry. Our first panelist would be W. Neal Menefee, who is President and CEO of Rockingham Group Insurance Companies on behalf of the National Association of Mutual Insurance Companies; followed by Mr. William B. Greenwood, who is President of the Lawton Insurance of Central City, Kentucky, and President of the Independent Insurance Agents of America; Mr. Mark A. Pope, who is Vice President and Director of Federal Relations for the Lincoln National Corporation for Fort Wayne, Indiana, on behalf of American Council of Life Insurance; Mr. Harry Rhulen, who is Chairman, President and CEO of the Frontier Insurance Group, Rock Hill, New York, on behalf of the American Insurance Association; and finally, Mr. James J. Kilbride, who is Chairman and CEO, Morse, Payson & Noyes Insurance, Portland, Maine, and Chairman of the Council of Insurance Agents and Brokers.
 Page 153       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    We will begin with Mr. Greenwood. Mr. Greenwood, if you could take the microphone and hold it close. Thank you.


    Mr. GREENWOOD. Let me briefly change my script from good morning, Mr. Chairman and Members of the committee to good afternoon. My name is Bill Greenwood, and I believe I have a unique distinction of appearing before you today as a working member of both the insurance and banking communities.

    In my role as an insurance agent, I am President of Lawton Insurance Agency which is located in Central City, Kentucky, and I serve currently as President of the Independent Insurance Agents of America.

    On the banking side, I am President of First United Bank Holding Company and a member of the board of directors of the Central City First National Bank. I am testifying today on behalf of the Independent Insurance Agents of America and the National Association of Life Underwriters, who together represent virtually all of the insurance agents in this country.

    First, Mr. Chairman, let me thank you again for holding these hearings. We have been working for many years on different financial reform proposals, and we have been before your committee on numerous occasions. And certainly I know you hope that this possibly might be the last time.
 Page 154       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    We have only one basic concern in this bill: Ensure that every entity that is involved in the insurance business is subject to State regulation. Federal banking regulators are in no position to substitute for the comprehensive State insurance laws that have been developed over the last 100 years.

    The version of H.R. 10 that you helped shepherd through the House last term, Mr. Chairman, was a bill that we supported because it would have provided some clarification and some certainty. As you know, the bill that is now before you, the 1999 version of H.R. 10, includes some of the positive elements that were included in the 1998 House bill.

    Sections 301 through 303, for example, include several provisions designed to ensure that everyone, including national banks, that engages in the business of insurance must comply with State insurance laws and regulations. For preemption challenges to State insurance laws enacted in the future, Section 306 stipulates that when a State insurance commissioner is challenged by a Federal banking regulators' view that a State law should be preempted, the view of both the State insurance regulator and the Federal banking regulator should be given equal consideration. H.R. 10 would thus go part way toward preserving the functional regulation of insurance.

    The proposal also would, however, jeopardize many of the consumer protections already in place in many States that protect the very consumers that this legislation is designed to serve. Agents believe that four changes would correct these shortcomings.

    First, the proper preemption of standards should be clarified. State officials are unclear as to what constitutes significant interference within the meaning of the Supreme Court's Barnett Bank decision, and this issue is destined to be the subject of protracted litigation.
 Page 155       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Such litigation could be averted if the Section 104 preemption provision clarifies that State insurance law are preempted only if they actually and constructively prohibit national banks or bank-affiliated entities from exercising their Federal authorized insurance sales powers.

    Second, the so-called ''nondiscrimination provision'' should be removed from the bill. As over 25 States and the OCC itself have previously recognized, the sale of insurance by federally insured banks creates unique problems that require consumer protections tailored for that context. Although the safe harbor provisions are an effort to capture many of major regulatory controls that currently are in place, they are too limited in that many existing State laws would go unprotected and they could not possibly take into consideration the wide array of issues that would require significant regulatory solutions.

    Third, clarify that State insurance regulators are entitled to receive consideration of their views in court when disputes arise between regulators, regardless of when a State law challenged on preemption grounds was enacted. The bill, as currently drafted, permits the views of State insurance regulators to be considered only in court challenges to law enacted in the future. The inevitable difference in any OCC preemption opinions regarding current laws would place many long-standing State laws in jeopardy.

    The OCC, however, simply has no expertise in the regulation of the business of insurance, and no special consideration of the OCC's views should be endorsed in the bill.

 Page 156       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Fourth and finally, strengthen the safe harbor provisions to ensure that, at a minimum, they protect all the valid State laws and regulations of bank sales of insurance that are currently in place.

    Mr. Chairman, I or our counsel, Scott Sinder, would be happy to address any questions that you have.

    Chairman LEACH. I thank you very much, Mr. Greenwood.

    Before turning to Mr. Pope, I am not sure I remembered to introduced Mr. Creighton, a member of the panel. And David Creighton is President of Bryton Companies of West Des Moines, Iowa on behalf of the National Association of Professional Insurance Agents. And we will get to you in a minute. But I failed in the first introductory round, I apologize.

    Mr. Pope.


    Mr. POPE. Thank you, Mr. Chairman. Good afternoon, Members of the committee and staff. My name is Mark Pope; I am Vice President and Director of Federal Relations for Lincoln National Corporation, located in Fort Wayne, Indiana. I am appearing today on behalf of the American Council of Life Insurance, the principal trade association for the Nation's life insurance companies.
 Page 157       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. Chairman, it has been said before, but I want to say it again at the outset, I want to sincerely applaud you for your tireless efforts to bring financial modernization legislation back to this committee. Without the type of leadership and commitment that you have shown, this process would have been at a dead stop. We are greatly encouraged by your dedication, and we look forward to working with you to bring this bill through the committee and see it through to its final completion.

    Last year, building on the foundation produced on a bipartisan basis by this committee under your leadership, the principal trade groups representing insurance companies, agents, banks and securities firms joined in an historic agreement to support H.R. 10. Now, time ran out on the attempt to bring that bill to the Senate floor, but fortunately, however, the agreement between the industries remains intact and has been embodied in H.R. 10 as reintroduced by you this year.

    The bottom line is that we support it as introduced.

    Now, it isn't perfect from anyone's perspective, nor is it necessarily the only way to accomplish needed reforms. However, it is fair, and it is the only financial modernization proposal which has the broad industry support that is necessary to achieve enactment.

    The principal provisions of H.R. 10 were painstakingly developed over the last two years as its predecessor bill made its way through this committee, the Commerce Committee and the Senate Banking Committee. Almost every provision was the product of extensive debate among insurance companies, agents, regulators and others; for every provision that was agreed upon, a dozen or more others were considered and rejected.
 Page 158       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    For that reason, departures from the insurance language in H.R. 10, no matter how seemingly minor or well intended raise substantial risk that they will upset the delicate balance which was achieved last year. And as we know, opposition from any major sector of the financial services industry could drastically reduce the prospects for legislation in this session. That is a situation that we all wish to avoid.

    Dynamic changes in our marketplace are continuing to occur. If these changes are not guided by a comprehensive modernization plan, the result will be regulatory anomalies and competitive inequities, which will make any future consensus that much more difficult to achieve. Now is the time to act, and we believe H.R. 10 is the vehicle.

    Mr. Chairman, while we are squarely behind the major provisions of H.R. 10, we believe that there are a few areas in which it may be significantly improved without disturbing the consensus for its enactment. Let me cite one example that has been touched on briefly by Mr. Vento and Mr. Hill.

    Currently, State insurance regulators are changed by law with the responsibility for protecting the interest of policyholders whenever there is a change in control of an insurance company.

    Under current law, State insurance regulators have broad authority to approve, disapprove, or condition a transaction under which a change of control of an insurer would take place. H.R. 10 would radically diminish the State's authority in this regard providing only that the Federal Reserve Board be in a position to disapprove an insurer-bank affiliation transaction. Our concern here is that H.R. 10, as drafted, contains no guidance or explicit statutory authority directing the Fed to consider the merits of an appeal from an insurance commissioner.
 Page 159       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    We believe that it is absolutely essential to require—that the law require that the Fed, as the umbrella regulator, consider a number of specific factors when it finds itself in the position of reviewing an insurer-bank affiliation. We, therefore, believe that H.R. 10 should be amended to provide that the Fed must solicit the views on such an affiliation transaction from the insurance regulator in the insurer's State of domicile and that in reviewing that transaction from the perspective of the best interests of the policyholders consider four factors which were included on pages 9 and 10 of my written statement.

    In closing, Mr. Chairman, we would only add that the need for this legislation is clear, the principal provisions are not in dispute, and there is no rationale for further delay. Here is an opportunity for Congress to enact historic legislation on a bipartisan basis that has broad support among the affected parties.

    We certainly look forward to working with the Chairman and the other Members of this committee to complete the finishing touches on H.R. 10 and send it to the House floor.

    Chairman LEACH. Well, thank you very much, Mr. Pope.

    Mr. Rhulen.

 Page 160       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. RHULEN. Good afternoon, Mr. Chairman. I am Harry Rhulen, CEO and Chairman of the Frontier Insurance Group, headquartered in Rock Hill, New York. And I am honored to be here this afternoon representing the member companies of the American Insurance Association.

    We also would like to commend your continuing efforts to make financial services modernization a reality. Because of this committee's leadership and nearly 20 years of effort, we are just about there.

    Why is this issue so important? Well, as the Chairman pointed out, the Depression Era statutory barriers between banking and other financial services are stifling growth and innovation in the financial services sector.

    In the absence of a rational and relevant statutory framework, our sector will continue to be shaped by ad hoc regulatory and court decisions that create competitive disparities among firms. We believe that H.R. 10 creates a viable regulatory framework and establishes a level playing field among financial services participants.

    It provides new opportunities for providers, increases consumer choice, and improves the international competitiveness of U.S. firms. Most importantly, and I don't think this can be understated, this is achieved while assuring the safety and soundness of our Nation's banking, insurance and securities systems.

    In 1997, the American Insurance Association was one of the first groups to endorse the prior version of H.R. 10, and we are proud to have been able to help shape the reforms as they moved through Congress. After two years of tremendous hard work and compromise by all participants, we came very, very close to passage. Time just ran out.
 Page 161       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    The AIA is proud to be here this year and we are delighted that financial services modernization remains a top priority for this committee and this Congress. The momentum remains intact.

    Virtually all segments of the insurance industry, not to mention banking and securities, support modernizing our financial services regulatory structure. We recognize that certain changes to the bill are likely this year. But we urge that the final proposal maintain overall balance so that it will maintain the same broad support. This is more than a matter of convenience. The principles of H.R. 10, as currently drafted, are the right principles for fair and effective financial modernization.

    I would like to quickly emphasize two of these principles that are critical to the fair and safe conduct of insurance in the new, highly competitive environment that H.R. 10 will foster. First, insurance regulators must be authorized to define insurance; and second, financial services modernization must include equitable dispute resolution standards and procedures. Both principles are necessary for success and one without the other would create a toothless and self-defeating type of legislation.

    We believe strongly in the principles of functional regulation allowing Federal bank regulators to oversee bank products and State insurance regulators to oversee the business of insurance. In order to create a viable system of functional regulation, Congress must establish an appropriate process for defining both banking and insurance.

    H.R. 10 represents a carefully negotiated compromise between the regulatory and private sector interests at stake. On the insurance side, it preserves State insurance regulators' authority to define existing insurance products, and most insurance products offered in the future. Banks retain the ability to offer any banking or insurance product that they are authorized to offer or were lawfully providing as of January 1st, 1997.
 Page 162       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    The insurance definitions of H.R. 10 provide the critical foundation for functional regulation. Moreover, they do not restrict the extent to which banks can affiliate with insurance companies and thus underwrite insurance products that are properly subject to insurance regulation. These provisions do, however, prevent banks from underwriting new insurance products that are not subject to insurance regulatory oversight.

    H.R. 10 ensures that the banking regulators, including the OCC, do not ignore the principle of functional regulation by redefining banking activities to include the business of insurance. Under any definitional scheme, disputes between banking and insurance regulators will arise as to whether a particular product is insurance or banking. H.R. 10 assures a fair means of resolution that preserves the principle of functional regulation.

    H.R. 10 provides that the Federal courts will decide disputes between regulators on the merits without unequal deference to either party. Three key provisions make this workable: the right for banking and insurance regulators to challenge one another's product definitions, expedited judicial proceedings, and the requirement that courts decide disputes on their merits without granting unequal deference to either State or Federal regulators. Taken together, this strikes the appropriate balance between the authority of the OCC as the supervisor of national banks and the ongoing role of the States in regulating insurance.

    Again, this also reflects the principle of functional regulation underlying H.R. 10.

    Mr. Chairman, I would like to conclude with some personal words. Although I am here representing the AIA, Frontier Insurance is not one of the giants you read about or have heard from today. We are a mid-sized and growing company that in 1977, through hard work and innovative products, broke into the top 100 property and casualty insurance groups based on net written premiums.
 Page 163       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    H.R. 10's passage is an important key to our continued growth. Its enactment will allow us to continue to flourish, based on our own skills and our entrepreneurial spirit. H.R. 10 is about mid-sized firms competing with the biggest to provide products and services to the American public secure in the knowledge that we are operating in a fair and predictable regulatory environment that is good for us, good for our consumers, good for competition, and good for the economy.

    On behalf of myself, Frontier's 1,300 employees, our 3,000 agents, our policyholders and the 300 member companies of the AIA, I respectfully urge H.R. 10's prompt passage, and offer any assistance we can toward that end.

    Thank you.

    Chairman LEACH. Thank you very much, Mr. Rhulen.

    Mr. Kilbride.


    Mr. KILBRIDE. Mr. Chairman and Members of the subcommittee, thank you for this opportunity. I am Jim Kilbride, Chairman and Chief Executive Office of Morse, Payson & Noyes Insurance of Portland, Maine.
 Page 164       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    I am also the 1999 Co-chairman of the Council of Insurance Agents and Brokers, and I am here today representing that organization. That organization is an association that represents the Nation's largest commercial insurance agencies and brokerage firms.

    My interest in the issues associated with financial services integration is more than academic. In 1997, our firm, the largest insurance agency in Maine, was purchased by the largest bank in Maine, Peoples Heritage Financial Group.

    I have been in the business almost 40 years, so I know many of our industry have misgivings about banks selling insurance. But I can report to you that our venture is providing a terrific synergy of talents and capabilities. Both our banking and insurance clients are benefiting from this affiliation.

    I am here though to testify specifically on Subtitle 6 of Title III of H.R. 10, the provisions regarding the creation of the National Association of Registered Agents and Brokers, commonly known as NARAB. These provisions were initiated in this committee by Congresswoman Kelly in the last session of Congress and supported on a bipartisan basis.

    We are grateful to Chairman Leach for the continued presence of the NARAB provision in H.R. 10 this year, and we strongly urge its adoption.

    Here is the problem and why NARAB is a good start on a solution: Whether we like it or not, consolidation is occurring throughout the financial services community, and with consolidation, the volume of interstate transactions is increasing tremendously. As you improve the laws governing regulation of these industries, Congress should assist in the modernization of laws and regulations that inhibit competition and add unnecessary costs to consumers. Agent and brokerage insurance licensing laws are badly out of pace with the marketplace of 1999, and they need to be modernized.
 Page 165       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Licensing for insurance agents is a State-by-State, line-by-line, class-by-class, producer-by-producer situation. In order for an agent or a broker to be able to service national accounts, he or she may literally have to obtain literally over 100 licenses, each with their own different criteria.

    The standards of professionalism required to get these licenses aren't all that high. But the redundancy, inconsistency and hassle factors are extremely high. More problematic than the duplication though are the numerous protectionist residency barriers that exist in the States. While some States have open markets, others are closed. Some States, for example, bar agents from soliciting or selling insurance in their State.

    In a world marketplace, these are trade barriers. They are also barriers to domestic interstate competition. The concept of NARAB is to provide a clearinghouse for the interstate licensing of insurance agents and brokers and to remove unjustifiable barriers to competition. It is totally voluntary and totally self-financing. This is not a way to bypass State licensing qualifications. No one would be admitted into NARAB who isn't already eligible to receive a license in their home State.

    There are numerous provisions in H.R. 10 that would assure that NARAB fits comfortably with State insurance regulation, and these are described in my formal testimony.

    I should note, though, that the bill allows the NAIC to run NARAB. As much as I would like Congress to enact NARAB as a licensing clearinghouse, there is an even more important provision within the NARAB subtitle.
 Page 166       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Under H.R. 10, the States would have three years in which to avoid the creation of NARAB. If only 26 States adopt reciprocal licensing statutes in three years, there will be no NARAB. This is a low threshold and attainable. It is an incentive for the States to act and it should be readily achievable.

    In conclusion, I would like to say that since NARAB was first put on the table in this committee two years ago, the NAIC has increased its attention to the problems of State-by-State licensing. They are pushing an agenda of uniform treatment for resident and nonresident agents and brokers, and their efforts are important and appreciated.

    Finally, interstate licensing is as much of a problem as it ever has been. Our trade association started working on this issue in 1939, urging uniformity, reciprocity, and free and open trade. We have still got a long way to go.

    The NARAB provisions of H.R. 10 are the incentive necessary to make progression on licensing reform. It is important for this incentive to remain a part of financial services modernization. We appreciate this committee's support for the provision of the past and look forward to its enactment in the future. And we thank you.

    Chairman LEACH. Thank you, Mr. Kilbride.

    Mr. Creighton.

 Page 167       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. CREIGHTON. Chairman Leach and Members of the committee, my name is David O. Creighton, Sr. I am the President of the Bryton Companies, a financial services company in West Des Moines, Iowa. I am also a partner in a small rural property casualty agency. I serve on the National Association of Professional Insurance Agents board of directors and act as the President of its services corporation. PIA is a national trade association representing the interests of over 180,000 independent agency brokers and their employees across this country. I bring a focus of both agents and consumers to these discussions.

    I am pleased to have the opportunity to address you today about H.R. 10 and the important issues surrounding comprehensive financial reform, and I congratulate Chairman Leach, a fellow Hawkeye, and Ranking Member LaFalce, for holding this public hearing.

    H.R. 10 will dramatically reshape the financial services industry and the ability of States to regulate the insurance sales activity, as well as protect the consumer. Having lived and worked in a place where banks and insurance agents have competed for many years, I can reaffirm the need for a level playing field throughout this country.

    PIA and agents everywhere strongly believe that State insurance regulation must be preserved to ensure consumers remain adequately protected. At the heart of the current debate about bank involvement in the insurance activity is the question of functional regulation. Everyone endorses such regulation but views it differently.

    PIA supports functional regulation, by which we mean that the States have the authority to regulate the insurance sales activity of everyone, including banks. The client-consumer expects that as well.
 Page 168       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Prior to the mid-1980's, there was never a question that States had the authority to regulate national banks and insurance sales activities. It never occurred to anyone that an agency or an agent was free from State regulation simply because the agent was affiliated with a national bank. This all changed with the Barnett decision which, on one hand, said States couldn't prohibit national banks from selling insurance, but on the other hand created an ambiguous standard on how States might regulate those insurance sales.

    Contrary to what you may have heard, PIA does not question the rights of banks to sell insurance so long as they do so under the same rules and regulations that we face. Our objective in both the House and Senate has been to resolve the ambiguity created by Barnett, and in doing so, avoid potential lengthy litigation as well as eliminate the possibility that the OCC will displace State regulation in bank insurance sales activities.

    H.R. 10 includes a number of provisions supported by PIA and the agent community at large. For example, Sections 301 through 303 reaffirmed the concept of functional State insurance regulation and the principles embodied in the McCarran-Ferguson Act. The safe harbors included in Section 104 are also helpful, and we applaud the committee for including these provisions.

    Unfortunately, when taken in its entirety, H.R. 10 jeopardizes many existing State consumer protection laws.

    PIA believes H.R. 10's shortcomings could be improved by the following four changes: One, the committee should eliminate the nondiscrimination provision; two, clarify that State insurance regulators receive equal consideration of their views in court; three, clarify the proper preemption standard; and four, strengthen the safe harbor provisions.
 Page 169       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    The nondiscrimination provision contained in Section 104(c) should be removed from H.R. 10. Currently, over 25 States and the OCC itself have recognized the sale of insurance products by financial institutions creates unique problems that require tailored consumer protections. These laws are not anticompetitive nor are they driven by the desire to keep banks out of the insurance business. They merely recognize the unique aspect of bank insurance sales operations and attempt to create a level playing field between banks and non-bank insurance agents while protecting the consumers from potential abuse.

    One only needs to look at Federal anti-tying provisions that prevent banks from pairing the extension of credit with the purchase of insurance to understand why States might enact laws that treat banks differently. Indeed, the OCC itself has recognized that there are many instances in which discriminatory regulation in the sense of treating banks differently than non-banks is appropriate and necessary. Consequently, there is no basis to argue that consumer protection provisions that discriminate against the banks are illegitimate.

    Second: H.R. 10 should clarify that opinions of State insurance regulators are entitled to equal consideration in court reviews of State insurance laws. Section 306 creates a special procedure, for court procedures challenging State insurance regulations and dictates that State insurance regulators and the OCC are entitled to equal consideration during that review.

    However, Section 104(b)(3)(C) exempts laws in existence prior to September 1998 and thus no equal deference standard. This exemption places in jeopardy a number of existing State regulatory provisions, this, especially maddening to PIA and to the insurance community at large, because the OCC simply has no expertise in the regulation of insurance.
 Page 170       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Finally, PIA believes that the current list of safe harbors included in H.R. 10 must be strengthened and at a minimum encompass the full range of safeguards included in the Illinois legislation. Consumer protection provisions are the essence of State insurance regulation, and we firmly believe that they need to be in place.

    In conclusion, PIA no longer opposes Federal efforts to permit affiliations between banks and the insurance industry; in fact, PIA and its members now embrace the prospect of viable financial services reform so long as the pertinent regulatory concerns are addressed lest consumers suffer. This means that a level playing field must exist for all of those who buy and sell insurance; particularly for PIA this means functional State regulation by State insurance departments charged with the task for almost two centuries. This should be for everyone who sells insurance, whether they do so from a professional insurance agent's office, a bank lobby or elsewhere.

    PIA thanks the committee and, in particular, Chairman Leach and Ranking Member LaFalce for permitting us to offer our views. We look forward to working with you on financial reform. Thank you.

    Chairman LEACH. Thank you, Mr. Creighton.

    Mr. Menefee.

 Page 171       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. MENEFEE. Good afternoon. My name is Neal Menefee. I am President and CEO of Rockingham Mutual Insurance Company. I am testifying today as Chairman of the Legislative Steering Committee of the National Association of Mutual Insurance Companies, NAMIC. NAMIC represents more than 1,200 property and casualty insurance companies, and the vast majority of them are organized in the mutual form.

    The most important message I can deliver to you today is that the current state of laws governing the financial services industry is unacceptable. Most insurance companies cannot effectively compete and serve the needs of current and potential customers unless Federal laws are changed, and soon.

    For instance, the company I manage cannot affiliate with a commercial bank situated in the Shenandoah Valley of Virginia, just a short distance from our offices. Even if there were a possibility of approval, we couldn't afford the legal and regulatory gymnastics necessary to get there under current law.

    I would like to focus my testimony today on two aspects of H.R. 10, the expedited and equalized dispute resolution mechanism in Section 306 and the mutual redomestication provisions found in Subtitle B of Title III. Both provisions are important to NAMIC members. And I am proud to say that NAMIC was instrumental in conceiving and promoting the dispute resolution mechanism, a linchpin of H.R. 10.

    First, some history: Faced with repeated Comptroller-led forays into their business by banks, insurance agents sought relief from the courts in the 1980's and 1990's. Relief was not to be found. The courts consistently ruled in the OCC's favor, invoking the Chevron doctrine which states that if a statute is silent or ambiguous with respect to a specific issue, the court should defer to a reasonable interpretation of the statute by the agency that has the duty to administer it.
 Page 172       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Section 306 allows conflicts between State insurance regulators and Federal banking regulators about the definition of banking and insurance products, and the extent of preemption of State insurance laws or regulations to be litigated expeditiously and without an equal deference to either regulator. In other words, Section 306 instructs courts to promptly review cases and rule on the merits, not the territorial interests of a particular regulator.

    This section distressed the OCC greatly last year and they may continue to oppose it. You should not be moved by their pleas. In the future, questions subject to the dispute resolution mechanism will involve conflicts between Federal and State regulators over the definition and conduct of insurance products and activities, and because the McCarran-Ferguson Act leaves the States as the primary regulators of insurance, it is reasonable and fair to require courts to show equal deference to a State insurance regulator and a Federal banking regulator.

    The need for an expedited and fair dispute resolution is obvious and retaining Section 306 is critical to our support of H.R. 10.

    As you know, capital is the lifeblood of financial services organizations. In the case of mutual insurance companies, however, options for raising additional capital are somewhat limited. That is why NAMIC members also strongly support the sections of the bill that address redomestication of mutual insurers. About 21 States have passed laws permitting their mutual insurance companies to convert into a mutual holding company structure.

    To take advantage of the new affiliations and powers granted by H.R. 10, an entity must be in a holding company structure. However, as noted above, not all States have passed the legislation necessary to allow mutuals to establish holding companies. This means, even with H.R. 10, mutual companies could be at a significant competitive disadvantage.
 Page 173       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Subtitle B of Title III permits a mutual insurer located in a State that has not yet approved mutual holding company legislation to transfer its domicile to a State that has. In order to use the Federal redomestication provision, the mutual's plan of reorganization must meet specified procedural and substantive requirements.

    Some have argued it is inconsistent for the insurance industry to both support the redomestication provisions of H.R. 10 and insist on maintaining State regulation of insurance. We disagree. Since H.R. 10 mandates a holding company structure for these activities and affiliations, Congress must recognize that mutual insurance companies will be disadvantaged if they are located in a State that does not yet permit such holding companies.

    H.R. 10 does not require States to allow mutual holding companies, nor does it create a Federal mutual holding company law. It merely allows insurance companies to move freely and without negative consequences into a State that allows them to create a holding company in order to enjoy the affiliations and powers granted under H.R. 10.

    We believe the redomestication provisions are forward looking, consistent with functional regulation, and necessary to fully equalize the implementation of this historic legislation.

    Though debates on financial services are often characterized as one segment of the industry versus another, it is important to recognize that with H.R. 10, the real winners at the end of the legislative process will be the American people. Financial modernization will enable consumers to access the entire range of financial products and services through whatever trusted source they may choose—a commercial bank, a securities firm, a life insurance company or their mutual property/casualty insurer. At the same time, these service providers will be free to compete vigorously to the benefit of the consumer with no individual segment enjoying an unfair advantage over any other.
 Page 174       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    By allowing financial services companies to compete equally in a regulatory structure that is sound, H.R. 10 will allow NAMIC members and their fellow insurance companies to better meet the current and the future needs of consumers.

    Thank you.

    Chairman LEACH. Thank you. Thank you very much, Mr. Menefee.

    Let me just begin with an IQ test. This town is filled with extraordinarily bright lawyers and people. But I would like to ask, Mr. Creighton, if you were asked the question what State in America provides the best law for a company to create an underwriting and insurance function, what State would you suspect that would be?

    Mr. CREIGHTON. Mr. Chairman, I would say that the great State of Iowa offers that opportunity.

    Chairman LEACH. I appreciate that. Let me just ask this question—particularly, Mr. Greenwood: There are a lot of ways of crafting laws of this nature, and there is a way that sounds like common sense. Someone says, I think we need a little narrower bill, and yet when you look at the narrow bill concept, there are some things that sometimes get left out, such as functional regulation.

    Would it be fair to say, from an insurance perspective, that it would be a mistake to try to get too narrow and that what you need is a comprehensive approach such as contained in the current version of H.R. 10? Is that a fair description, or would that be a mistake?
 Page 175       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. GREENWOOD. I think it would be a fair description, Mr. Chairman.

    I think the important thing is, you keep in mind the consumer as well as the change, and the Barnett decision and what that meant to us. I think what agents are asking for is clarity on this, for Congress to act on the term ''significant interference,'' because that seems to be the most basic common threat of what I have heard here today. The country needs leadership on that. And I think we look to you for that.

    Chairman LEACH. OK. Well, I appreciate that. I also appreciate that the landscape of finance changes very rapidly and philosophical perspectives get immensely shaped by the landscape. And I recognize probably as much as any, although a lot of people share this, that the industry communities had certain doubts about bank modernization over time.

    And yet at this point in time, despite some fairly deep reservations and some preferred models, there appears to be a degree of consensus to move forward as long as things are, relatively speaking, balanced.

    Is that a fair description from the majority of this panel?

    Mr. GREENWOOD. No question, balance is the key to that. You have heard about a level playing field today, and you have heard the other things. And we have to say to you that the insurance industry recognizes that we are moving into a changing world. At the same time, it takes time for both the regulatory process and for the agent and company process to change to where the consumer is not hurt or damaged.
 Page 176       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    So I would say a common-sense approach to orderly moving into this direction is something that is going to benefit all of us. And certainly I think the key here, though, is—when you talk about functional regulation is that there truly be a clear understanding about all of the players as to how this is going to play out in the future, or we are going to spend millions and millions of dollars in litigation fees trying to define these questions.

    Chairman LEACH. Well, you raised an important issue. I mean, the more one can be definitive in terms of framework, the more one can avoid conflicts in the future. And I think that is something that all sides have an extraordinary vested interest in doing.

    Mr. GREENWOOD. Certainly you know the history, and in the last session and this year, as we have worked with the Bankers Association, we have recognized that there must be compromise and more unity in these areas. At the same time, there are some basic principles that we stand for, like the State regulation of insurance, but we have also compromised on many of the other topics here.

    Chairman LEACH. Thank you.

    Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman.

 Page 177       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. Greenwood and Mr. Creighton, I want to direct my questions primarily to the two of you, because it sounds like everybody else is kind of on board here. And I want to be clear on where you all are.

    I have not heard from my Independent Agents this term of Congress, and maybe that is a sign that they are exactly satisfied. But do I understand that the two of you are representing the Independent Agents and that despite the fact that you had some three or four different concerns about this bill, if those concerns were—obviously, if those concerns were addressed, I take it you would be supportive of H.R. 10 as introduced?

    Mr. GREENWOOD. No question, if those concerns were addressed——

    Mr. WATT. Whether you get it or not?

    Mr. GREENWOOD. Let me just state, I don't want to speak for my friend from PIA. I am here representing the Independent Insurance Agents of America, together with the National Life Underwriters, and we, like in the Senate portion we negotiated with the bankers, remain silent on our support of this. We think there are some concerns here that need to be addressed, and rather than jump out and say, ''Yeah, we are going to support this, we feel a bill is needed.''

    We need to move orderly in the direction of getting a bill. But at the same time, you haven't heard from your Independent Agent, because no one has advised him or her as to what our position is.
 Page 178       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. WATT. Well, that is true. I mean, that doesn't always stop them from calling me and expressing their opinions though.

    Mr. GREENWOOD. That is what makes him independent, and we love it.

    Mr. WATT. I have had two different ones on the same street call me and give me two different opinions sometimes.

    Mr. GREENWOOD. Again, we are independent.

    Mr. WATT. Mr. Creighton, do you want to respond? Assume the four items that you addressed that need to be changed didn't get changed; would you be supportive of the bill, as it is currently introduced?

    Mr. CREIGHTON. I think that we would probably gravitate toward—probably toward prochoice, as the Congressman said.

    Mr. WATT. I am sorry. Say again.

    Mr. CREIGHTON. I think we would gravitate——

    Mr. WATT. Are we talking about abortion or insurance here?

 Page 179       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. CREIGHTON. Congressman LaFalce——

    Chairman LEACH. If the gentleman would yield, we had some earlier discussion.

    Mr. WATT. I missed that part.

    Chairman LEACH. Some of these discussions have involved choice, some others, a proprudence perspective.

    Mr. WATT. OK. I missed that discussion. I am sorry.

    Mr. CREIGHTON. I am sorry, Mr. Congressman. Assuming those four items were addressed, we would move toward favoring that bill, yes. We are neutral at this moment, similar to what AIA said.

    Mr. WATT. All right. I take it there is nobody at this table who has a particular dog in the fight about whether you do this as a holding company or as an op sub? That is kind of more a banking, big guys issue than it is in insurance?

    Mr. POPE. That is a big insurance issue.

    Mr. WATT. Let me hear your opinion on that then.

    Mr. POPE. The American Council of Life Insurance strongly opposes the op sub provision in H.R. 10. We do not support the bill if it were in.
 Page 180       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. WATT. Beg your pardon?

    Mr. POPE. We not support the bill if it was in.

    Mr. WATT. That was the next question I was getting ready to ask you. It is one thing to strongly oppose, and it is another thing to oppose it and encourage people to vote against it. You would not go there?

    Mr. POPE. We would—we could not support a bill that had an op sub provision in it.

    Mr. WATT. Why is that?

    Mr. POPE. Well, if we have a few moments, let me try and go back a little bit to the history of this. But in an op sub situation, most of the discussion heretofore has been about the bank and the bank level and is there a cost advantage to the bank to have an op sub organization versus a holding company situation.

    I think more what is happening to the subsidiaries in that situation—let's take, for example, not that there is a subsidiary that becomes financially distressed, but let's say the bank at the top becomes financially distressed, and in that situation the banking regulator has certain options available to him or her, such as prompt corrective action, such as least-cost resolution provisions, which dictate that that regulator make that bank well by pulling funds up from the subsidiaries back to the bank to fully capitalize the bank.
 Page 181       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Now, when that occurs, a subsidiary could very well become ill, and the insurance regulators' protests to stop that kind of a withdrawal of funds from the sub back to the bank level would be unheeded because prompt, corrective action—certainly, I believe the least-cost resolution provisions supersede any type of an insurance commissioner's protest to the contrary.

    In the affiliate structure, separately capitalized affiliates, the Fed, as the umbrella regulator of the financial services holding company, does not have the authority to pull funds to dividend funds up from one affiliate through the holding company and back to another affiliate that may be ill; they can require divestment, but they can't require one separately capitalized affiliate to get into a financially distressed situation.

    Mr. WATT. So are you assuming always that the parent of the op sub is always going to be a bank?

    Mr. POPE. Yes, sir.

    Mr. WATT. OK. So you don't conceive that it would be an insurance company then?

    Mr. POPE. I don't think that any op sub provision that I have seen provides for the insurance company at the holding—or at that level. I believe it is a bank with operating subsidiaries under it. That is the way I have always seen it written.

 Page 182       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. WATT. OK. All right. I am learning.

    Thank you, Mr. Chairman. I yield back the balance of my time.

    Chairman LEACH. Thank you.

    Well, Mr. Greenwood comes with two hats as being an independent banker and independent insurance agent.

    Our next member of the panel comes with at least two hats as being an independent Member of Congress and former head of one of the most innovative insurance companies in the country; and so, as our expert on insurance, Mr. Hill, would you proceed?

    Mr. HILL. Well, thank you, Mr. Chairman. Let me just stay on this question Mr. Watt asked, because, Mr. Pope, you are the only one that answered that question. And incidentally, I agree with your position.

    But, Mr. Rhulen, do your folks have a position with regard to the op sub question?

    Mr. RHULEN. I would say that we would support H.R. 10 regardless of the decision that was made on op subs.

    I would also like to point out—and correct me if I am wrong—that if the equitable resolution standards and procedures which were put—which are supposed to be put in place as part of H.R. 10 were in fact enacted, the insurance regulators would have the power to prevent upstreaming of money from an insurance company in the same way that they have that power now to prohibit me from upstreaming money from my insurance companies' subsidiaries to the parent holding company.
 Page 183       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    So those protections already exist today in the insurance environment. And I don't know why they wouldn't continue to exist as long as the State insurance regulators were given the power to combat the Federal regulators on the banking side.

    Mr. HILL. Obviously, the other side of that question is whether or not it operated as a subsidiary, there is a migration of subsidy, as well, in terms of capital and other sets of issues.

    I guess I would ask you, Mr. Menefee, do you folks have any view on the issue of op subs?

    Mr. MENEFEE. Yes, sir, our position would be similar to the two gentlemen ahead of me. We would be concerned about operating subs, particularly to the degree that it allowed insurance underwriting.

    Mr. HILL. All right. The issue is risk-taking. H.R. 10 allows operating subsidiaries for sales purposes. While we are on that subject——

    Mr. WATT. Would the gentleman yield for half a second, because I have been told that the bill that Mr. LaFalce was contemplating would not allow insurance underwriting in the op sub. Do you all understand that to be the case?

    Mr. MENEFEE. We have not——

 Page 184       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Chairman LEACH. If the gentleman would yield, that is my understanding, that it would not allow either real estate development or insurance underwriting, but would largely allow merchant banking; and that is the major differentiation from the bill that came out of the committee last year.

    Mr. WATT. Would the gentleman continue to yield? Just allow me to ask Mr. Pope whether that changes his opinion.

    Mr. HILL. So long as you ask consent to give me more time.

    Mr. WATT. I just want, with that clarification, whether Mr. Pope—whether that would have any bearing on Mr. Pope's statements earlier.

    Mr. POPE. Congressman, I can't speak for the securities industry. And I think that that is what the LaFalce bill would do is to allow op subs for securities, but not for insurance. If that is the situation, I think—you know, we need to see what the language is, but we can certainly work with it.

    Mr. WATT. Thank you. Thank you. And I ask unanimous consent that Mr. Hill be given two additional minutes.

    Chairman LEACH. Without objection, that is agreed to. We have a rule here though that when there is a preeminence of intellect, extra time is allocated.

    Mr. WATT. Under that theory, you can give him at least one additional minute.
 Page 185       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. HILL. Mr. Chairman, does the time taken for discussion of yielding count against the time that I would be yielding?

    Just kidding. Thank you, Mr. Chairman.

    I just want to quickly go on with that. Do any of you have a position with regard to the thrift charter question with regard to H.R. 10? Mr. Pope? Mr. Menefee? Mr. Rhulen? Do any of your associations have any position with regard to that? I don't think the agent groups do.

    How about with respect to baskets allowing for commerce and banking. Mr. Pope, does your association have a position on that?

    Mr. POPE. Congressman, the ACLI will support the bill either way when it comes to the basket. So I think——

    Mr. HILL. Mr. Rhulen?

    Mr. RHULEN. The AIA similarly will support the bill.

    Mr. HILL. And Mr. Menefee?

    Mr. MENEFEE. Yes, likewise.

 Page 186       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. HILL. Going back to—I made a point earlier about the public official and real positions. I think H.R. 10, as it now stands, is kind of boiled down to the real positions that everybody has. I mean, it seems to me that some groups are in the neutral position; other people are supporting it, however, would like to see changes; but it seems that there is a pretty delicate balance that has been accomplished here.

    The concern I have is really with regard to the matter of functional regulation with regard to the issue of solvency more than anything. I think the sales issue is pretty well worked out here. I mean, I think that there are some concerns and, Mr. Creighton, I agree with some of them that you have raised. But the real question here is whether or not we are going to be interfering with the solvency of the insurance industry by these new financial institutions, the restrictions on State regulation.

    Mr. Pope, you made one really good recommendation, I think, and if you have some more that you want to provide, I would appreciate your contacting our office, because I think you are right about that. I think there has to be deference to the State regulators with regard to those matters.

    If there are others, I would just ask, if I could, if any of you have any other specific to that matter of solvency that you think ought to be incorporated into H.R. 10 that is not there now?

    Let me start with you, Mr. Menefee.

    Mr. MENEFEE. No, sir, I don't know that I have any specific recommendation, although I think our feeling is that we need H.R. 10 in order to address the rapidly evolving issues so we do maintain the solvency of the industry. We feel like perhaps without H.R. 10, or some form thereof, then that is very questionable going forward.
 Page 187       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. HILL. Mr. Greenwood.

    Mr. GREENWOOD. No comment.

    Mr. POPE. Congressman, let me just expand for a few minutes on what I said in my testimony; and this is an issue that kind of came to me a little late in the game, and perhaps since I was a little dense and didn't quite understand what the NAIC was trying to get to when it came to the authority of the Federal—of the Federal Reserve Board when it comes to the affiliation of an insurance company by a bank, what I think comes from all three years of studying this bill, but what I think bothers me the most is that the Federal Reserve, for all of its power and all of its intelligence and certainly the way it has run the economy—it is a tremendous organization—for all of that power and all of that intelligence, I don't believe it has any experience whatsoever with regard to managing an insurance company.

    That expertise lies in the 50 State insurance commissioners. That is why each and every State has passed a law that says, before you allow an insurance company to be taken over, you have to go before a State insurance commissioner, present your case, stand up before a hearing, and that commissioner has to make specific findings of fact and conclusions of law that dictate that it is in the best interests not of the companies involved, but it is in the best interests of the policyholders that that merger or that acquisition take place.

    What bothers me about H.R. 10, as it currently stands, is the Fed is allowed in the mega-merger, the $40 billion and above situation, to make that determination, but it has no ground rules. It has no framework from which to determine how one finds out what is in the best interests of the policyholders. And that is different from being in the best interests of a depositor or the best interests of a holder of a security.
 Page 188       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    So in my opinion, the language that we have put in my testimony helps provide the Fed with some solid groundwork, some solid guidelines with which to make that determination. We think it is pretty important.

    Mr. RHULEN. Every State has an insurance guaranty fund that protects the policyholders on admitted policies written in that State. As long as H.R. 10 contains language which defines insurance and provides an equal playing field for the Federal and State regulators, the protection of solvency of the insurance companies should be pretty much assured through that process, as long as the Federal regulators are not allowed to invade the policyholder funds of the insurance companies.

    Mr. CREIGHTON. We don't have any real comment on this.

    Mr. GREENWOOD. Let me just follow up, Congressman, in saying that the one thing I think that I recognize in being both, in the past 20 years, regulated by the Comptroller through banking and by the State insurance department in Kentucky is the difference in territorial regulation. The fact that the insurance product and the local situation—whether it be the difference in Montana or in Florida, or the difference in the marketplace, experienced elected regulators versus appointed regulators—on and on and on—is that the consumer is best protected when the regulation is at the local level. And I think that is the thing that, as we talk, whether it be about solvency or the consumer protections, that we want to protect the State's ability to know what is happening in that State. And many times, particularly with smaller, regional companies, it might be knowledge that something as far as the solvency of an insurance company is in jeopardy or whatever by their behavior.
 Page 189       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    It is going to be an extremely difficult product to regulate any way other than at the closest-to-the-consumer level, and that is why we stand so firmly behind State regulation.

    Mr. HILL. I thank all the members of the panel for their great input.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Hill.

    Mr. Sweeney. Excuse me, Mr. Sweeney; I am sorry. There is a Democrat present.

    Mrs. Jones.

    Mrs. JONES. Hear, hear for the Democrats, concerned about banking as well. A couple of questions. Thank you, Mr. Chairman.

    I think you are Mr. Rhulen, right?

    Mr. RHULEN. Yes.

    Mrs. JONES. You said that you had no problem as long as the Federal regulator was not permitted to invade—finish that.
 Page 190       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mr. RHULEN. The policyholder funds of the insurance company.

    Mrs. JONES. So, in other words, if the State had a fund that protected—that was supposed to pay off policyholders, and it ran out of money, just for example, and there was some suit against your company—I mean, I don't think that is going to happen now—but you are saying that you would be supportive of this only if he didn't have to pay out of your individual funds and the dollars solely came out of this fund that the State held of policyholders, right?

    Mr. RHULEN. No, no. Two issues. The insurance company has surplus which is there to protect interests of the policyholders directly. If there ever was an insolvency of an insurance company where that surplus has been completely diminished, the State steps into the shoes of the insurer and therefore provides that protection to the policyholder.

    What you wouldn't want to allow is the Federal banking regulators to get at the surplus of the insurance company, thereby putting them in an insolvent position, where previously they were not.

    There are risk-based capital standards for insurance companies where you could easily put an insurance company into an insurance department control situation by virtue of taking enough surplus out of the insurance company without actually putting it into bankruptcy.

    Mrs. JONES. I wanted to be clear on what your response was. Thank you very much.
 Page 191       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Based on H.R. 10, though, I have heard from the bankers and the savings and loans and now the insurance companies—independent, as well as agents, as well as companies. Are there more bankers likely to sell insurance, or are there more insurance persons than ever thinking about going into banking? We can start at the far end.

    Mr. MENEFEE. Congresswoman, I am not sure I hazard an answer to that question. I think we——

    Mrs. JONES. What do you think?

    Mr. MENEFEE. We all appreciate there is convergence of financial services to the degree I think that consumers are looking more and more for a combination of products. So I think you would certainly see some of both. To say that there would be more bankers selling insurance than there would be insurance companies or agents offering banking products, I don't know that I would try to draw that line, but——

    Mrs. JONES. Are you thinking about becoming a banker if H.R. 10 passes?

    Mr. MENEFEE. We are paying close attention to what our customers are looking for and working to be responsive in that regard; and I would say, as I heard several comments early this morning, that the advantages of an electronic commerce world makes some of the things more available to small and medium-sized companies like ours than we have had in the past.
 Page 192       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    So, yes, we are looking at what our customers tell us they want, yes, ma'am.

    Mr. GREENWOOD. Well, certainly as the agents association, we recognize that financial modernization and financial services are going to merge in the future. We have already applied for a thrift charter. I can tell you that I have some reservations, I guess, with what an individual can actually keep up with in this new, emerging area, as to whether or not they can be specialists in securities and in financial institutions and in insurance.

    I do think technology is going to drive integration, but at the same time agents across this country know that their relationship with the customer is the thing that gives them value.

    Mrs. JONES. Since I am running out of time, I don't want the rest of you to answer that question.

    I want to ask you another question, Mr. Rhulen.

    Mr. RHULEN. Yes, ma'am.

    Mrs. JONES. I am looking at your testimony on page 4. Let me give you a little quick background where I come from. I am a former district attorney for eight years, a judge for ten years before that.

 Page 193       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    You are going to rely upon a court for an expedited hearing in order to agree to H.R. 10? That is what you are telling me?

    Mr. RHULEN. It is in the bill. I guess that is the only language that I could rely on.

    Similarly, I also am an attorney, and in an order to show cause, we often get expedited proceedings. I guess we would look for that same type of treatment in this situation, especially where it could imperil the safety of one of our insurance companies or our banks.

    Mrs. JONES. So you are looking for equity status?

    Mr. RHULEN. Absolutely.

    Mr. POPE. Mrs. Jones, I believe that what the expedited dispute resolution process provides for is, it skips the district level of the court. The dispute between the regulators would begin at the court of appeals level and then move to the Supreme Court.

    Mrs. JONES. The circuit court.

    Mr. POPE. You would save one level. It is expedited a little better than it would be then, starting at the Federal district court level.

    Mrs. JONES. Let me continue down this trail a little bit—or this path, excuse me.
 Page 194       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    With regard to what the Federal court must consider, a regulator must consider that the Fed must solicit views on the affiliations, looking at the State regulators' opinions; and then it goes on to say on the next page, or the page before, that the regulator shall—even though ''must'' and ''shall'' is the language used, we all recognize that after that, it becomes I ''must'' consider, it still is left to my discretion as a hearing officer or as a judge to make a determination.

    You all are comfortable with that language?

    Mr. POPE. I would rather have it the other way, where the insurance commissioner makes the determination, but I am not going to get that. In this situation, we will rely on the Fed's best judgment. But the language that I have in my testimony gives the Fed some guidelines that we didn't have before, quite frankly.

    Mrs. JONES. Thank you.

    Mr. Kilbride—Mr. Chairman, may I have a couple more minutes?

    Chairman LEACH. Absolutely, absolutely.

    Mrs. JONES. Mr. Kilbride, in your testimony you were talking about NARAB and that in a State—if the State couldn't agree to the licensing of an insurance person after two years, then NARAB would come into place.

 Page 195       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Why are you much more comfortable allowing a regulate—I hate to call it a ''regulation,'' but a Federal grouping to authorize agents across the board and not a Federal grouping to license insurance companies? Am I clear?

    Mr. KILBRIDE. Not totally.

    Mrs. JONES. Do you want me to try it again?

    Mr. KILBRIDE. Please.

    Mrs. JONES. OK. Currently each State licenses insurance agents, right?

    Mr. KILBRIDE. Yes.

    Mrs. JONES. You are saying to me that in order to improve the financial or economic opportunities in this country, you would suggest that in order for us to operate interstate, or agents to operate interstate, if a particular State could not come up to or resolve licensing of a particular agent within a two-year period, then this group called NARAB would do that, is that correct, authorize that person to operate outside the State in which he or she was licensed? Am I correct?

    Mr. KILBRIDE. No, I don't think it is quite correct.

    First of all, the period is three years, before the creation of NARAB, which would be run by State insurance commissioners, and they would be on the board. They would have the chairmanship of that board, and they would continue to——
 Page 196       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Mrs. JONES. But they would oversee the entire country, correct?

    Mr. KILBRIDE. They would oversee their States.

    What we are trying to do here is get uniformity in licensing to make it easier for agents to get licensed from State to State. We are not trying to have them get Federal regulation here.

    Mrs. JONES. You are going to put it differently than I am. In essence, though, you are saying that this group would allow someone to operate interstate as a licensed agent, correct? NARAB would be the authorizing agent?

    Mr. KILBRIDE. It would facilitate the ability of an agent to operate from State to State.

    Mrs. JONES. You are playing with my words.

    Mr. KILBRIDE. No, I am not trying to.

    Mrs. JONES. Yes, you are. But what I am suggesting is, if in fact a group of people could get together to authorize an agent to operate interstate, why is it not conceivable that a group of people could get together to authorize regulating insurance interstate?

 Page 197       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. KILBRIDE. I think it is conceivable.

    Mrs. JONES. But it is not proposed in this bill?

    Mr. KILBRIDE. It is not proposed in this bill because we have enough opposition from the NAIC to NARAB.

    What we are trying to do is put in a provision that will allow them to support our position as opposed to further take issue with it.

    Mr. RHULEN. If I may, just for a moment, keep in mind also you have got 50 States where any individual insurance company that is licensed—that is domiciled in a particular State, that State insurance commissioner is responsible for the guaranty fund that supports that company. They are not likely to want to let someone else have control over that insurance company when the policyholder and the citizens of their State are really the ones responsible.

    Mrs. JONES. I wasn't contemplating that in my discussion. What I was contemplating in my discussion is, if you are going to go interstate, or interstate in licensing insurance agents, why wouldn't you be willing to go full ream and go interstate in licensing insurance companies per se?

    My last—no more questions for you.

    Mr. Chairman, the only question I want to say is, according to my assistants, Delaware is supposedly the State where getting insurance is supposed to be the best in the land.
 Page 198       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    Chairman LEACH. Well, you have second-best information, but I am——

    Mrs. JONES. It came from some book.

    Chairman LEACH. I would say to the gentlelady, if there is any unstated consensus in this room, it is the following. If any of these people are operating a financial institution and if any of them were to ask who they met in the last six months that they would like to sell their products, I think the name Mrs. Jones would come out number one.

    Mr. Sweeney, we will go to you—if you have a further question, we will go to another round. Mr. Sweeney.

    Mr. SWEENEY. Thank you, Mr. Chairman. Maybe let me ask this question that my good friend was asking, but from the other side, to Jim Kilbride.

    How do we assure those who worry that a uniform licensing process is not an infringement on States' rights and how do we assure those people that by doing so, by creating this system, that we are not going to displace any uniform licensing regime or any State law that governs? How do we answer that question when we are asked that?

    Mr. KILBRIDE. I think we answer it by saying that, first of all, our provision gives the regulation to State insurance commissioners and superintendents. They are the ones who will run NARAB. They are the ones that still will have the jurisdiction over all the agents that are licensed in their State, both resident and nonresident.
 Page 199       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    So it is something that they run; we have given them that authority in this provision. There should be no reason why they are reluctant to pick up that authority. They certainly aren't now.

    Mr. SWEENEY. And what standards would be applied to ensure that State law is not preempted in any regard? I mean, what protections are provided to ensure that?

    Mr. KILBRIDE. The same ones that are existing now.

    Mr. SWEENEY. OK.

    Mr. KILBRIDE. What we are trying to do is make it easier to get agents licensed from State to State, an easier process with some uniformity. It is a simple as that.

    Mr. SWEENEY. OK. And I only have one other question, and it really is a follow-up on a question I asked Michael Smith in the prior panel. And it is to Bill Greenwood.

    In your testimony, you stressed the need to clarify preemption standards with respect to restrictive State regulations. Could you characterize for me the degree to which State laws may be preempted under the current language?

    Mr. GREENWOOD. Let me just say when we mentioned that maybe 25 to 30 States out there that already have enacted consumer protections for banks' sales of insurance, and we looked at the strength of each of those, the stronger States with more consumer protection, I would say, are from Rhode Island to Illinois, Florida, West Virginia, those types of laws.
 Page 200       PREV PAGE       TOP OF DOC    Segment 1 Of 3  

    The way that safe harbor provisions are in this H.R. 10 language, many of those would actually be weakened because there is the very process of a separate office for the sales of insurance, for instance, it is not a part of safe harbor, but on the other hand, and in many of these States that is of concern that the consumer be protected against intimidation or coercion. So I think that when we talk about State regulation, the ability of a State to regulate its banking and insurance environment, they are closer to the local level.

    Mr. SWEENEY. I happen to agree very strongly with you.

    I yield the rest of my time, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Greenwood.

    Mrs. Jones, do you have another question?

    Mrs. JONES. You mean I get to ask another question?

    Chairman LEACH. If you would like.

    Mrs. JONES. I did have one more question. Thank you, Mr. Chairman. To each of you insurance agents who plan to, or insurance corporations that intend to become banks, you will abide by the Community Reinvestment Act and be prepared to go back to the community to provide them what they need under the law, correct?

 Page 201       PREV PAGE       TOP OF DOC    Segment 1 Of 3  
    Mr. RHULEN. No question.

    Mrs. JONES. Excuse me, all right. I want to be clear now. I am good at cross-examination.

    Thanks, Mr. Chairman, I appreciate it.

    Chairman LEACH. It is your intention to abide by the law; is that correct?

    Well, let me thank you all. And I think this has been a very, very helpful panel, and I am very appreciative of the perspectives that have been presented.

    This brings today's hearing to an end. The hearing is adjourned.

    [Whereupon, at 5:20 p.m., the hearing was adjourned.]

Next Hearing Segment(2)